- Days left

Withholding Your Taxes

Figure out the tax withholding status that makes sense for youOne of the keys to avoiding penalties or other nasty surprises come tax time is to make sure your withholding is correct. Withholding can sometimes feel complicated, but it boils down to just a few issues: filing status, number of dependents, pay frequency and pay amounts.

Social Security and Medicare (sometimes referred to together as "FICA") taxes are the easiest to figure: Those taxes are simply withheld from your wages by your employers at a flat rate. In 2010, the amount withheld from your pay for Social Security is 6.2% on earnings up to $106,800. The amount withheld for Medicare is 1.45% on all earnings.

It's worth noting that this is not the case for 2011. As a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, there's a one year "payroll tax holiday" for employees. For 2011 -- and only 2011 -- the amount withheld from your pay for Social Security will be 4.2% on earnings up to $106,800 (the amount withheld for Medicare remains 1.45% on all earnings). That means a taxpayer earning $50,000 will see an extra $1,000 in his or her take-home pay in 2011.Federal income tax withholding is not a flat rate and is based on your individual circumstances. Tax rates for 2011 will remain the same as those for 2010; the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended those tax rates for an additional two years.

The best way to figure out the correct amount for your employer to withhold is to complete a federal form W-4 (the 2010 form W-4 is downloadable here).

You'll report basic information on the form W-4, such as your name, address, Social Security and marital status. You'll also report the number of personal exemptions you wish to claim; you figure this using the personal allowances worksheet attached to the form W-4. The basic rule is that the more allowances you claim, the less money will be withheld from your paycheck each pay period. The number of allowances should coincide, roughly, with the number of exemptions and deductions you'll claim on your tax return. If you get stuck figuring out that amount, try the IRS withholding calculator. It's not a substitute for the federal form W-4, but it can help you figure out how many exemptions to claim.

Local and state income tax withholding are generally automatic -- unless you're not a resident of the city or state where you work. If you're not, you should check the individual rules to determine what you'll need to file. For example, if you live in Philadelphia but work in Wilmington, Del., you're still subject to the City Wage Tax even if it isn't being withheld; conversely, if you live in Wilmington, Del., but work in Philadelphia, you are subject to the City Wage Tax which will likely be withheld for you at the employer level. Despite the loud grumblings about wage taxes in cities like New York City and Philadelphia, a large number of smaller municipalities and townships have similar tax schemes. Check with your employer to see what's being withheld and check with your local government to find out how your local taxes work.

If you've done the math correctly, there should be no surprises come tax time. However, the burden is on you to make sure you continue to have the correct withholding taken from your check. If you get married, have a baby, take on an additional job or otherwise change your financial picture, you should complete a new form W-4 so your employer knows to make changes in your withholding.

Increase your money and finance knowledge from home

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

TurboTax Articles

8 Things You Think Are Tax Deductible That Aren't

There?s a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the Internal Revenue Service. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don?t qualify under IRS guidelines. Here are a dozen items that can lead to unpleasant surprises in case of an audit.

9 Things You Didn't Know Were Tax Deductions

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.

A Comparative Look at State Taxes

Ever wondered which state has the highest gas tax or the lowest overall tax burden? Interact with the infographic below to compare income tax, property tax, and other taxes by state.

Add a Comment

*0 / 3000 Character Maximum