Tax Withholdings: What You Should Know To Keep More of Your Money
Federal withholding tax, or tax withholdings, is a set amount of money withheld by your employer and paid directly to the government. If you’re traditionally employed in the United States, you pay taxes every year through withholding.
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So, how exactly does the withholding process work? How do you know if you’re paying too much or too little in federal withholding taxes? This article will walk you through everything you need to know to get the most out of your tax return in 2024.
What Is Federal Withholding Tax?
Federal withholding tax is a portion of your income paid to the IRS by your employer. In other words, your employer pays your federal taxes on your behalf. If you pay too much in withholding taxes throughout the year, you’ll get a refund after you file your taxes. If you pay too little, you’ll owe money to the IRS.
Withholding taxes is a standard taxation process in countries around the world. This process makes it easy for workers to pay their taxes, but it also comes with complications — if you aren’t doing your due diligence each tax season, you might be paying more than you need in withholding taxes.
How It Works
Every non-exempt employee of a company pays a certain percentage of their income in withholding tax. That percentage depends on a number of factors, including the employee’s income level, IRS tax bracket, and withholding allowances. You can see the amount withheld from each paycheck on your pay stub.
Upon hiring you, your employer will ask you to fill out Form W-4, which tells how much to withhold from your paycheck based on your marital status, exemptions, and other factors. The IRS recommends re-filing a W-4 every year in case your circumstances change. At the end of the fiscal year, your employer will send you a W-2. This form breaks down your annual earnings and withholdings so you can file your tax return.
Withholding tax is not a perfect science. In most cases, your withheld taxes will be more than what you actually need to pay. That’s why many Americans receive tax refunds after filing.
Types of Tax Withholdings
Not all withholding tax goes to the federal government. State, local and FICA taxes are also withheld from most paychecks. If you’re confused by the amount withheld from your paycheck, here’s a breakdown:
Federal income tax: These rates are the same throughout the country and make up the bulk of your withheld tax .
State income tax: These rates vary based on factors like where you live and work. Not all states have a state income tax.
Local taxes: These fund public systems in your city or county.
Social Security tax: You may see this labeled as OASDI on your pay stub. Paying this tax lets you benefit from Social Security credits later in life.
Medicare tax: The current Medicare tax rate is 1.45% for employees and employers. This funds health care for older and disadvantaged Americans.
FUTA/SUTA taxes: The Federal and State Unemployment Tax Acts help to fund unemployment for people in your state and around the country. This tax may show up on your paystub, but it’s paid by your employer, not withdrawn from your income.
What if You’re Self-Employed?
If you are an independent contractor, business owner, or other self-employed professional, your tax filing process looks a little different. Instead of having part of your paycheck withheld, you must set aside part of your income to pay quarterly estimated taxes. Self-employed individuals often qualify for more deductions than traditionally employed workers but are still subject to the same federal, state, and local tax rates.
How Do Federal Tax Brackets Work?
State and local taxes vary, but federal income tax rates are the same throughout the country. The rate you’re charged depends on your tax bracket. Because tax brackets change each year to account for inflation and economic circumstances, it’s important to check your current bracket based on your income level before you file.
Here are the federal tax brackets for a single taxpayer on income earned in 2023:
Income | Tax Rate |
|---|---|
$0-$11,000 | 10% |
$11,001-$44,725 | 12% |
$44,726-$95,375 | 22% |
$95,376-$182,100 | 24% |
$182,101-$231,250 | 32% |
$231,251-$578,125 | 35% |
$578,126 and up | 37% |
If you are married and filing jointly, your tax bracket will account for a two-income household. Here are the rates for 2023:
Income | Tax Rate |
|---|---|
$0-$22,000 | 10% |
$22,001-$89,450 | 12% |
$89,451-$190,750 | 22% |
$190,751-$364,200 | 24% |
$364,201-$462,500 | 32% |
$462,501-$693,750 | 35% |
$693,751 and up | 37% |
Remember that tax brackets can change each year. For income earned in 2024, the IRS has released these changes, which will apply when filing your taxes in 2025:
Income | Tax Rate |
|---|---|
Over $11,600 ($23,200 for married couples filing jointly) | 12% |
Over $47,150 ($94,300 for married couples filing jointly) | 22% |
Over $100,525 ($201,050 for married couples filing jointly) | 24% |
Over $191,950 ($383,900 for married couples filing jointly) | 32% |
Over $243,725 ($487,450 for married couples filing jointly) | 35% |
How To Maximize Your Savings This Tax Season
Even though your employer pays taxes on your behalf, every American taxpayer is required to file a tax return at the end of the fiscal year. The purpose of the tax return is to determine whether you overpaid or underpaid through withholdings. If you overpaid, you’ll get a tax refund after you file.
It’s more common for traditionally employed Americans to get a refund than to owe more on their taxes. Although a huge refund check might be fun to receive, it means you’re seriously overpaying through withholdings. Here are a couple of ways you can maximize your savings and keep more of your money each year.
Check Your Tax Withholding
It’s important to check your tax withholding at least once a year. Tax brackets change, and factors in your life such as marriage, moving, having a child, and changing jobs will affect how much tax your employer withholds.
Use an online tool like the IRS tax withholding estimator to determine how much should be withheld from your income. If your estimation looks different from what you see on your pay stub, you may need to file a new W-4 with your employer.
Claim Tax Deductions
Claiming tax deductions is the most significant way to get more out of your tax refund. Deductions reduce the amount of your taxable income, meaning less of your money is paid in taxes. The most common tax deductions include:
Medical expenses
Local or state sales tax
Mortgage interest
Charitable donations
IRA contributions
Business expenses such as travel, work-from-home expenses and materials
Jury duty pay
Certain disaster losses
Keep More of Your Money in 2024
Tax withholding allows you to pay your federal, state and local taxes without taking up too much of your time. However, if you want to keep more of your money, you can’t be passive about your taxes. It’s important to know exactly how much you should owe and what you can deduct each year.
If you’re paying attention to your tax withholdings and maximizing your deductions, you can expect a better tax refund in 2024.
This article originally appeared on GOBankingRates.com: Tax Withholdings: What You Should Know To Keep More of Your Money
