Your boss has to take out money from every paycheck to pay various federal and state taxes. The percentage of your salary that goes to taxes depends on where you live and how much you make. Some taxes use a progressive rate schedule -- the larger your salary, the greater the percentage of your income that goes to taxes. Don't turn down that raise because it might push you into a higher bracket, however, because the higher rate only applies to your income in that bracket.
Part of your salary might be exempt from taxes, depending on what you spend it on. For example, health insurance premiums aren't hit with payroll or income taxes. In addition, employers can pay for up to $50,000 of life insurance for employees without the employee having to pay payroll taxes or income taxes on the cost of the policy. Other pretax deductions, such as 401(k) contributions, escape income taxes, but not payroll taxes. For example, for total compensation of $90,000, if you contribute $10,000 to your 401(k), pay $5,000 in health insurance through your employer and your employer pays premiums of $1,000 for $50,000 of life insurance for you, only $84,000 is subject to payroll taxes and only $74,000 to income taxes.
Social Security and Medicare taxes are the two payroll taxes you'll typically have to pay. As of 2013, the Social Security tax is 6.2 percent of up to $113,700 of your salary for the year. The Medicare tax is 1.45 percent of your entire salary. If your salary is over $200,000 for the year, there is an additional Medicare tax of 0.9 percent on that portion of your salary. For example, if your 2013 salary is $350,000, you pay 6.2 percent in Social Security taxes on the first $113,700, 1.45 percent in Medicare taxes on the entire $350,000, and 0.9 percent in additional Medicare taxes on the last $150,000, for a total of $13,474.40 of payroll taxes, or 3.85 percent of the salary.
The federal government -- and many states -- use a progressive income tax. As of 2013, the federal tax rates range from 10 percent of your first $8,925 of income if you're single or $17,850 if you're married filing jointly, to 39.6 percent of income over $400,000 if you're single or $450,000 if you're married filing jointly. Depending on where you live and work, you might also be on the hook for state and local income taxes. Those rates vary from state to state, with some states having no state income tax at all to other states with high taxes. For example, Hawaii taxes income over $200,000 -- $400,000 for joint filers -- at 11 percent.
Withholding Versus Tax Liability
The amount your employer withholds from your paycheck isn't necessarily the amount that you owe when you file your return. Withholding is an imperfect science based on your filing status and the number of allowances you claim. When you file your return, you might be eligible for additional deductions or credits that lower your taxes. Alternatively, you could owe more if you have outside income or claimed too many personal allowances on the W-4 that you turned in to your employer. So, to figure your effective tax rate, divide your actual tax liability -- including your federal income taxes, payroll taxes, and state and local income taxes -- by your salary. For example, say your salary is $100,000, you have a total of $22,000 withheld for all your taxes and you get a refund of $2,000. Your total tax liability is $20,000, or 20 percent of your salary.
- Internal Revenue Service: Publication 15 -- Employer's Tax Guide
- Internal Revenue Servce: Questions and Answers for the Additional Medicare Tax
- Family Research Council: Employer-sponsored Health Insurance: The Single Largest Tax Subsidy in the Federal Budget
- Internal Revenue Service: 401(k) Resource Guide -- Plan Sponsors -- 401(k) Plan Overview
- Internal Revenue Service: States Without a State Income Tax
- Bankrate.com: 2013 Tax Brackets
- Bankrate.com: States With the Highest Personal Income Tax Rate
- The Tax Foundation: State Income Tax Rates, 2000-2012
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