Small Business Tax Help: How to Use the IRS Tax Tables to Figure Withholding

There is a simple formula for figuring out how much tax to withhold from your employees’ paychecks.  All you need is a few bits of information and you’re good to go.  Here’s what you need:

  1. IRS Form W-4 from each employee
  2. IRS Tax Tables for the current year
  3. The simple formula below

Where Do I Find the IRS Tax Tables for the Current Year?

Each year the withholding amount will change, so you have to make sure you have current year’s numbers.  These are available from IRS Publication 15 on the IRS website.

You need IRS form W-4 because it will tell you how many allowances he or she is claiming.  The W-4 will also tell you the marital status of the employee, which comes into play in the formula.

How To Figure Withholding

And here’s the formula.  This is the actual example published in IRS Publication 15.  This is for a single person who is claiming 2 allowances.

The wage amount of $600 per week comes from you, the employer…what are you paying that employee and how often?  That goes in line one.

Line 2: that comes from the IRS tax tables for the current year.  Each withholding allowance is worth $73.08 for 2012.  Multiply the allowance amount by the number of allowances and you get the amount that is not subject to withholding.  Therefore, subtract it: $600 – $146.16 is $453.84.

You will use that reduced amount of $453.84 when you consult the IRS tax tables for withholding.  Look up that amount in the weekly section of the IRS tax tables.

1. Total wage payment……….. . $600.00
2. One allowance ………….. . $73.08
3. Allowances claimed on Form W-4 . . 2
4. Multiply line 2 by line 3……… . $146.16
5 Amount subject to withholding
(subtract line 4 from line 1) …… . $453.84
6. Tax to be withheld on $453.84 from
Table 1—single person, page 36.. . $ 53.53

Posted on July 18, 2012 by , Reply

Tax Facts: Your IRS Tax Rate Doesn’t Apply to All of Your Income

IRS tax rates work in a marginal framework.  That means that different tax rates will apply to different portions of your taxable income.  Think of a ladder, and each rung represents a higher income level.  Some people make enough money each year to make it to just the second rung up.  Some people make a little more and they will be on the next rung upwards.  Then there are the people who make so much money they are all the way at the top of the ladder.

Now picture each of the different IRS tax rates mapped on to a rung on the ladder.  The bottom rung will be the 0% tax rate because some income levels are so low they virtually pay no taxes.

The second rung up the ladder will be the 10% tax rate, then the 15%, 25%, 28%, 33%, 35% rates.  Now, the people sitting pretty at the top of the income ladder will pay each of the IRS tax rates represented below.  They’ll pay 10% tax on the first $8,700 (using the 2012 IRS tax rates).  For the next chunk of income they’ll pay at the 15% rate, and depending on how many IRS tax rates their income spans on the ladder, a higher percentage for each level.

And that’s how marginal tax rates work.

Posted on July 18, 2012 by , Reply

How the IRS Tax Brackets Can be Deceiving

Want to know what percentage of your salary goes to the IRS? The IRS tax brackets are not much help.  That’s why using the IRS tax brackets to estimate how much you pay in taxes is a mistake.  Believe it or not, IRS tax brackets do not give a very accurate view of how big of a chunk you’ll end up paying when you do your federal taxes.

That’s because there are all sorts of other taxes you will have to pay, not included in the figures used on the IRS tax brackets.

For example, Social Security taxes and Medicare are not part of the figures used in tax brackets.  The tax tables won’t tell you how much of your income will go towards social security or medicare.  The tax brackets also have nothing to do with any self-employment tax, which matters a lot if you’re self-employed.

There’s also the Alternative Minimum Tax (AMT), which affects higher income taxpayers but also will not be reflected in  the IRS tax brackets.  Therefore, the best way to know what percentage of your annual income you’re paying the IRS is to actually do your taxes.

 

Posted on June 7, 2012 by , Reply

What Will the 2013 IRS Tax Brackets Be?

What will happen to the 2013 IRS tax brackets largely depends on what Congress does with the expiring Bush-era tax cuts.  One of the first things Bush did as President was to cut income taxes, estate taxes, and capital gains taxes.

Those tax cuts, enacted between 2001 and 2003, expired in 2010 and then were extended for two years.  Now the Bush-era tax cuts will expire on December 31, 2012. When they expire, the 2013 IRS tax brackets could look very different.  One of the things Bush did was to create a new tax bracket at the bottom rung: 10%.  Before that, the lowest tax rate for Federal Income taxes was 15%.  After Bush’s reforms, the lowest rate was 10%.  For the first $8700 or so, everyone has been paying just 10%.  That’s a tax cut across the board, affecting every taxpayer.

But that could go away.  Here’s what could happen, and what’s expected to happen.

  1. The highest of the 2012 IRS tax brackets is 35%.  It is expected that it will remain the same, although some think it will go up to 40%.  That will affect only the very rich, since most taxpayers don’t make enough money to reach that tax bracket.
  2. The bottom rung could go away, as mentioned above.  The lowest of the 2013 IRS tax brackets could be 15%, as opposed to the lowest for 2012, 10%.  That means everyone will be paying 15% on the first $8700 or so, rather than 10%.  That’s a major increase since it increases by 50% the amount of taxes paid on that first chunk of income.  It’s also a major increase because it affects all taxpayers.

 

Posted on June 7, 2012 by , Reply

The 2012 IRS Tax Brackets

Tax year 2011 has come and gone for most individual tax payers and now we can look ahead to the 2012 IRS tax brackets.  The expected changes are minimal since there was a two-year extension of tax cuts.  The tax cuts were implemented during the Bush era but will expire at the end of 2012.  What will happen to the 2013 IRS tax brackets is anyone’s guess.

For 2011 you could make $8500 annually and only pay 10% federal income taxes.  This tax bracket will change slightly: the upper limit on the 10% bracket is expected to be $8700.  This is for individual (single) taxpayer status, by the way.

For married filing jointly status the couple can make up to $17,400 and pay just 10% income tax on all the taxable income.  Here’s how the 2012 IRS tax brackets are expected to look.  The first column is for Married Filing Jointly and the second column is for single taxpayers.

10% Bracket $0 – $17,400 $0 – $8,700
15% Bracket $17,400 – $70,700 $8,700 – $35,350
25% Bracket $70,700 – $142,700 $35,350 – $85,650
28% Bracket $142,700 – $217,450 $85,650 – $178,650
33% Bracket $217,450 – $388,350 $178,650 – $388,350
35% Bracket Over $388,350 Over $388,350

 

Posted on May 30, 2012 by , Reply

What are IRS Tax Brackets?

IRS Tax brackets concern your Federal income tax and they are used to figure what percentage you will pay on your taxable income.  Our tax system is designed to be fair to all income levels and the complex tax code that results is called a progressive tax. IRS tax tables show different income tax percentage rates for different incomes, and they’re essential when doing one’s income tax.

The progressive tax system is based on the theory that if the IRS were to apply a flat tax to all taxpayers then the low income taxpayers would be shouldering too much of the burden.  As the taxable income goes higher, so does the percentage paid in taxes.  Again, the theory is that taxpayers with a higher taxable income have more ability to pay.

The IRS tax brackets show an increasing percentage as the income goes up.  Everyone pays 10% on the first $8.500, no matter how much their taxable income.  Then the rate is 15% for income from $8,501 to $34,500.  The IRS tax brackets show how your taxable income will be taxed: at different rates for different portions.

Posted on May 1, 2012 by , 1 comment