The gross pay is the amount you get paid before any taxes. Your employer processes payroll and makes sure that you pay your fair share of taxes. Several taxes start with your gross pay and reduces it to the net pay. After your net pay, you have no obligation to anyone as you’ve already paid taxes.
To understand how this works, we need to take a look at payroll processing. Assume your paycheck for the week is $2,000. You will pay Social Security and Medicare taxes based on gross pay. Then, you’ll pay income taxes. The federal income taxes are mandatory but your state might not tax wages or income at all. So there are at least three different taxes you are subject to and must pay through payroll processing. You won’t pay any taxes directly yourself as it’s your employer’s job to withhold income taxes and forward them to the Internal Revenue Service or the state tax department. Again, only if the state taxes wages.
Social Security and Medicare tax calculator
The combined rate of Social Security and Medicare taxes is 7.65 percent. All employees are responsible to pay at this rate. These taxes are also known as FICA taxes which stand for the Federal Insurance Contributions Act.
Individually, the Social Security tax rate is 6.2 percent and Medicare tax is 1.45 percent. There is also additional Medicare withholding which will affect net pay. For income over $200,000, employees are subject to 0.9 percent additional Medicare tax. This additional withholding combines the total Medicare withholding to 2.35 percent, but only for the income earned above the threshold. There is no additional withholding for Social Security taxes.
Federal, state, and local income taxes
If you’re going to earn more than $12,400 during the tax year, you will withhold federal income taxes. You may also pay state and local income taxes. Those who are expected to earn less than $12,400 during the tax year, can fill out Form W-4 to claim an exclusion from federal income taxes. Your exempt status will be enough to let your employer not withhold any income taxes.
The income tax rates are different for everyone but the majority of it depends on the salary. The more you make, the higher you’ll pay in income taxes. It’s as simple as that. The easiest way to ensure your employer withholds the right amount of income taxes is to provide the payroll department with Form W-4 or the state equivalent of the form. If not furnished, the employer may withhold tax at a higher rate than you would because the Internal Revenue Service mandates employers to withhold income tax at the highest single rate in absence of the withholding form.