Learn all about the federal withholding tax meaning and what it has to do with social security tax withholding in today's article.
Federal withholding is one of the many ways employees interact with their taxes. It starts with form W4 that employees fill out when they first start a new job and ends with how taxes are (or aren't) taken out of your paychecks.
Federal withholdings are an important part of the US tax system and if you are a traditional employee, then it’s a good idea to learn more about tax withholding meanings and how they work.
If you have a complicated tax situation, you can always seek professional tax help at any Check City store.
What is Federal Withholding?
Federal withholding is the amount of taxes that are taken from your paychecks, by your employer, to pay taxes on your behalf.
One of the primary ways that taxpayers pay their taxes is through individual income tax. Income tax, or FIT Tax, is paid when employees get federal income tax (FIT) withheld from their paychecks each month by their employer.
Then, at the beginning of every new year, you will either come short and still owe federal income taxes (FIT), or the earned income taxes you paid will be enough and you won't get a tax bill from the IRS.
What is FITW Tax?
Federal Income Tax Withholding (FITW), or FITW Tax, is the amount of money taken from an employee's wages to cover federal income taxes.
It is the process when employers withhold a portion of an employee's wages to pay for federal income taxes.
The number of federal withholdings that the employer withholds for taxes depends on the employee's income, deductions, and the choices the employee makes when filling out their W4 form.
The employer then submits these calculated withheld taxes to the IRS on the employee's behalf on a regular basis throughout the tax year. This ensures that taxes are paid throughout the year rather than in a lump sum at the end.
How Do Federal Tax Withholdings Work?
Learn the steps for how federal tax withholdings work if you want to know the answer to, what does withholding tax mean.
Federal tax withholdings start with the W4 tax form you fill out when starting a new job. If you start multiple jobs, then you may end up filling out multiple W4s.
A W4 form is different from a W2 tax form, which is something you get annually to help file their tax returns. A W4 form is something new employees fill out when starting a job.
On the W4, new hires can outline the payroll tax they want taken out of each paycheck for their employers by claiming federal withholding allowances.
These payroll taxes go toward things like social security and Medicare taxes.
Steps for How Federal Tax Withholdings Work:
- Employee fills out W4
- Employer calculates the withholding amount based on employee's W4
- Employer withholds taxes from employee's paycheck based on calculations
- Employer sends withheld taxes to the IRS
- Employee files tax return to report total income, deductions, credits, and the amount of federal income tax withheld
How you set up your federal withholdings will determine your take-home pay after taxes. Some employees decide to withhold less taxes from their paychecks so that they can see more of that pretax money in their take-home pay.
If you do this, you can get a larger take-home pay each month, but you may end up owing more in taxes later.
Otherwise, if you allow your employer to withhold more taxes from your paychecks, you will be less likely to owe tax money and may even end up with a tax refund instead!
What is Publication 15-T?
Publication 15-T is an IRS document that outlines the official Federal Income Tax Withholding Methods employers should use when calculating federal withholdings from their employees' paychecks.
How to Choose Your Regular Withholding Allowances
You'll choose your number of regular withholding allowances when you fill out the W4. Now let's explain what some of these words mean to make that process easier.
W4 withholdings refers to how much money is withheld from your paycheck to pay taxes.
W4 allowances refers to how many withholding allowances you claimed on the W4 form.
How much money is withheld from your paycheck to pay taxes depends on how many withholding allowances you claim on the W4 form.
The more allowances you claim, the less money will be withheld from your paycheck and the less taxes you'll pay each paycheck. This could cause you to owe taxes after filing your return each tax season.
The less allowances you claim, the more money will be withheld from your paycheck and the more taxes you'll pay each paycheck. This could cause you to overpay in taxes and potentially get a tax refund after filing your return each tax season.
So if you want a bigger paycheck, claim more allowances, but be aware that you'll be paying less toward taxes per paycheck and may owe taxes later.
And if you want to not owe taxes later, or potentially get a tax refund, then claim less allowances or no allowances.
There are other types of allowances too like Expanded Withholding Tax (EWT). This tax is "expanded" because it covers a wider range of income payments than the regular withholding tax.
Do I Qualify for Exemption from Withholding?
If you qualify for an exemption from withholding, this means that you are able to claim a full exemption from federal withholding. This means that your employer is not required to withhold federal income tax from your paychecks.
You may qualify for exemption from federal withholding if you don't expect to have any federal income tax liability for this year or the prior year. This could happen if you work for a tax-exempt organization like a nonprofit.
But, claiming this exemption is not the same as being exempt from federal income taxes, Social Security taxes, or Medicare taxes.
How Much is Social Security Tax Withholding?
Social Security tax withholding is a system where employers withhold a portion of an employee's wages to pay for Social Security taxes.
The current Social Security tax rate is 6.2%, and employers and employees each pay this amount on wages up to a certain limit. For the year 2023, the limit is $147,000.
The Social Security tax withheld from an employee's paycheck is then reported and submitted to the Social Security Administration by the employer on the employee's behalf.
What Percentage of My Paycheck is Withheld for Federal Tax?
The percentage of your paycheck withheld for federal taxes can be found out by taking a closer look at the payment summaries on your pay stubs.
Your paystub will outline your total earnings, total deductions, total taxes, and your net pay so you can see how much of your paycheck goes to taxes.
*Personal Finance Tip: Your net pay is your take-home pay. This is the amount of money you actually receive after all taxes and deductions have been made.
What is FIT on my Paycheck?
FIT on your paycheck is where your paystub will outline the amount of Federal Income Tax withheld from your paycheck.
Look at the total taxes section of your paycheck and you'll see exactly how much of your paycheck goes to taxes. From there, calculating what percentage of your paycheck is withheld for federal taxes is easy.
All you have to do is divide the "total taxes" amount on your paystub from your "total earnings" amount. Then, move the decimal point to the right 2 spaces and you have the percentage of your paycheck withheld for federal taxes.
Percentage of My Paycheck Withheld for Federal Taxes Formula:
Total Earnings = 2,000
Total Taxes = 400
You don't want to include the total deductions amount in this calculation because this amount has to do with other payments that get taken out of your paycheck by your employer like, health insurance payments, 401K payments, and more.
