Tax Withholdings Explained

payroll tax

 

Do you ever look at your paycheck... really look at your paycheck? A look at my paycheck offers a variety of information. It shows my earnings (salary), my deductions (retirement, insurance, etc.), and taxes (seemingly lots of taxes).

Here's a breakdown of the tax withholdings in my paycheck...

  • FIT = Federal Income Tax. Per the Merriam-Webster Dictionary, Income Tax is defined as a tax on the net income of an individual or a business. Employers withhold monies from your pay based on a rate determined by your gross wages. The IRS offers a Withholding Calculator to help determine if you are having too little or too much withheld from your paycheck.
  • SS & MC = Social Security & Medicare a.k.a. FICA a.k.a. Payroll Tax. This tax is paid by both employees and employers. The payroll tax is calculated as a percentage of your income up to a maximum amount. In 2011, the Federal Government cut the payroll tax from 6.2% to 4%. This was done in lieu of extending a tax benefit known as the Making Work Pay tax credit. As of January 1, 2013, the reduction in the payroll tax is no more and workers will see their rates rise back to 6.2%. Don’t worry too much though; this money should come back to you in the way of Social Security and Medicare benefits, allowing that you reach retirement age and that the federal government is able to sustain these programs.
  • SWT-OK = Oklahoma State Income Tax. This last item on the tax withholdings side of my paycheck is state income tax. Just as with federal income tax withholdings, the state withholding is a percentage of earned income.

When it’s all said and done, federal and state governments seem to take quite a bit of my paycheck. But I don’t mind. I know that money is being used in a variety of ways and takes care of a variety of societal needs like education, public safety, public health, transportation, infrastructure, and more.