Taxes are inescapable. Provided that you earn over the minimum amount of nontaxable personal income then you will be expected to pay income taxes on your earnings. Although people rarely enjoy having to pay their taxes, your taxes are used for a variety of different programs that improve the country, protect your rights and provide for a certain standard of life all Americans have come to expect. They are therefore a necessary and worthwhile expense.
These tax-funded programs include defense and security spending, social security, health programs, education, scientific and medical research, and transportation and infrastructure among other essential services. We all use these services or may need to in the future so it is our combined responsibility to shoulder the burden of their cost.
State taxes pay for more local services such as to build and maintain roads, fund agencies that protect the public like the police and prison services and for social services like education and health programs.
According to the Center on Budget and Policy Priorities, the 50 states and Washington, D.C. "spent $1.2 trillion in state revenues in the fiscal year 2016." Your tax dollars are going to work at both the state and federal levels.
What Are Withholding Taxes?
Most employers are required to deduct taxes from their employee's gross salary before releasing payments. If at the end of the tax year you are deemed to have overpaid in your weekly, bi-weekly or monthly deductions withheld by your employer, you will be issued a tax refund. On the other hand, if you have not paid enough, you will receive a tax bill for the outstanding amount. It can be stressful to be faced with an unexpected bill which is why having your taxes withheld by your employer can help to alleviate some of this worry.
Withholding taxes were introduced in the 1940s, according to Investopedia, in response to World War II and the need to raise funds for the war effort. The country couldn't afford to wait until tax time to see an injection of funds from the public, so the tax withholding system was adopted.
Most Americans can expect to see at least two tax deductions on their payslip; federal and state withholding taxes.
What Is the Difference Between Federal and State Withholding Tax?
For most people, their taxes are deducted at source and they don't see the full amount they paid unless they request this information or wait until the end of the tax year to examine their tax refund or return. Employers take the tax directly out of the wages and send it to the state and the government.
Employers use the W4 form that you fill out to calculate exactly how much money to deduct from your paycheck. You may owe money to the government if your employer has not deducted enough. Therefore, it is a good idea to use an online calculator that estimates how much tax you should be paying and gives you a monthly or weekly amount that should be deducted from your pay.
You can then compare this with the dollar amount that your employer is deducting to see if you need to make extra payments or put some money aside in savings until the end of the fiscal year. You can find an online tax calculator to work out the correct withholding taxes on the Internal Revenue Service (IRS) website.
State withholding tax is collected on behalf of the individual state where you work and federal taxes are sent to the federal government.
Your employer must send these deductions to the state and government departments in a timely manner and they are forbidden from using this money for any other business costs or expenses. Doing so is a crime for which they can be heavily penalized.
Taxes have to be paid as you earn your income through withholding payments or by making estimated payments. By the time tax season comes most taxpayers should have arranged for 90 percent of their taxes to have been paid in advance and there can be penalties for being behind on your tax payments.
How to Fill Out Your W4
On the W4, employees note their personal tax situation including any dependents and their marital status which helps their employers to calculate the right amount of tax to deduct. If your personal circumstances change, you should alert your employer so they can make any necessary changes to your information and alter your tax deduction burdens. If you go through a divorce, have a child or pass an age restriction you'll need to make sure your data is up-to-date.
These circumstances increase the number of allowances you can claim. The more allowances you have the less you will pay in federal and state withholding taxes.
Since there were changes made to the tax laws in 2017, you should make sure the information on your current W4 is correct and relevant.
If you update any information, your employer must process that information within 30 days.
Complete the W4 worksheet before updating your information to make sure you are getting the most allowances possible. You might consider speaking with a financial advisor, especially if you are starting a new job or your circumstances have changed drastically, to make sure you are getting as much of your hard-earned income as possible.
The first four lines of your W4 form are for personal information like your name, address and Social Security number. On the fifth line, you'll use the information you calculated on the worksheet to input your allowance information. If you are unsure, you can also ask your employer for their advice or call the IRS to speak with an expert.
Which States Withhold Taxes?
Most states, a total of 41, require employers to withhold state taxes from their employees. The exceptions are the states of Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming which do not have a state income tax.
In these states, where there is no state tax and therefore no state tax deductions made on your wages, workers are able to hold on to more of their earnings. States that don't charge taxes raise funds for social services and infrastructure costs in other ways such as through sales, property and corporate taxes.
What if You Have More Than One Job?
Lots of people may find that their taxes are complicated if they have more than one job on which they need to pay income taxes.
You may wish to split your allowances on your W4 forms or claim all of them on one form and none on the other. Make sure you remember to include both jobs when using the online calculator to estimate your deductions. You must be careful not to accidentally try to claim allowances for both jobs at the same time since it's not allowed.
Mistakes like this might not be caught right away, but they will eventually be discovered and could lead to a large tax bill or even fines and penalties.
Other Deductions to Expect
If you study your payslip, you'll see that federal and state withholding taxes are not the only deductions made to your wages before you get the balance in your hand.
Sometimes it feels as though there are more things taken out than left in. Along with those state and federal withdrawals, you can expect to see deductions for Social Security tax and Medicare tax, both of which your employer will also have to make a contribution towards. You might also see deductions for other things which may or may not be subsidized or boosted by your employer. These deductions include retirement benefits, health care costs or other items like union dues or special-equipment costs. There may also be other deductions like special one-off expenses such as flowers for a colleague's funeral or shared costs of hosting a company party, for example. Other deductions may be taken from your wages including court-appointed garnishments like those for child support payments, tax debts or pre-agreed repayments of loans.
What About Self-Employed People?
Self-employed people do not have an employer to deduct their state withholding tax on their behalf. However, they still need to pay taxes.
They can choose either to withhold these taxes themselves or simply pay them in a lump sum quarterly in the usual way. Self-employed people and businesses need to estimate what their taxes will be. If they pay too much they can expect a refund but if they pay too little they can be subject to fines and penalties. They will also have to remember to make their own employer contributions to Social Security tax and Medicare taxes on top of their employee contributions.
Self-employed people can still claim the allowances available as someone with dependents or who is married. Since their situation is a little more complicated than a regular employee, they may benefit from the advice and support of a professional financial advisor or certified accountant.
Is Anyone Exempt From Paying Taxes?
According to the IRS, the following are excluded from having to pay both federal and state taxes on their income:
- Single people under the age of 65 who make an annual income of less than $9,350.
- Young people aged 19 or younger or full-time students under the age of 24 are considered to be dependents.
- Self-employed people who earn less than $400.
- Married people under the age of 65 who make an annual income of less than $18,700.
- Single people over the age of 65 who have an annual income of $10,750 or less.
- Married people over the age of 65 who have an annual income of $20,900 or less.
- Widowed people over the age of 65 who have a dependent child, and make less than $16,150 annually.
If you are not sure if you have to pay state or federal taxes, call the IRS and ask for confirmation of your status as a taxpayer.
The vast majority of workers should expect to have deductions made from their earnings for both state and federal taxes. These taxes are essential to maintaining the efficient running of the country. Not completing your W4 can have dire consequences. If you complete it incorrectly and have too little tax withheld, you can be charged a $500 fine.
If you neglect to fill in a W4, the IRS will require your employer to withhold the highest possible amount and you won't be able to claim any allowances. That's why it is so important to file a W4 as soon as you start a new job and check the information regularly to make sure it reflects your personal circumstances and adapts as your life changes. It's just not worth the risk.
Then, when tax season rolls around, you can feel confident you have paid what you owe, and you might even be able to expect a tax refund to come your way.
Fiona Tapp is a freelance writer and educator. Her work has been featured on The Washington Post, HuffPost, The Toronto Star, Brit+Co, and others. She writes about a variety of topics including Homes, Parenting, Education, and Travel. Fiona is a former teacher and masters degree holder.