From time to time, it can be useful to calculate how much your tax withholdings for the year will be, so you can tell whether or not you can expect to owe money or get a nice tax refund. Fortunately, it's easy to do this using the information from a recent paycheck stub. Here's how to calculate it, and how to use this information.
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The taxes on your paycheckSome people incorrectly assume that the difference between their gross pay and their net pay is completely due to taxes being withheld. For example, if the gross pay is $2,000 and the paycheck is for $1,500, they may assume $500 went to taxes. However, the truth is a bit more complex.
An example of the various taxes that can be withheld from a paycheck.
There are several deductions that can come out of your paycheck, including these taxes:
- Federal income tax-- You may see this listed as "Federal," "Fed Tax," or some other variation. This is the tax withheld by the IRS.
- State income tax-- If your state has an income tax, a portion of your paycheck will be withheld for this purpose.
- Local taxes-- Some cities and counties have their own income taxes, but this isn't terribly common.
- Social Security taxes-- May be listed as "SS" or "FICA." For 2015, you'll have 6.2% of your paycheck withheld for Social Security taxes, up to the first $118,500 you earn. Unlike income taxes, Social Security taxes are not refundable at the end of the year.
- Medicare taxes-- Taxed at a rate of 1.45%, Medicare taxes are not refundable, as well.
Aside from taxes, there are many other possible non-tax deductions. For example, it's common to have insurance benefits, retirement contributions, flexible spending account contributions, and union dues deducted.
Estimating your annual taxesWrite down the federal, state, and local income taxes that were withheld from one of your recent pay stubs, preferably one without any "unusual" income like bonuses or overtime. Then, multiply this amount by the appropriate factor.
What to do with this informationOnce you've estimated how much tax will be withheld for the year, you can use a tax calculator like this one from TurboTax -- making sure it's designed for the current tax year. Using your salary, withholdings, and deduction information, the tax calculator can give you a pretty good estimate of whether you should expect a tax refund in the spring, or if you should plan on owing money to the IRS or your state/local government.
Adjust your withholdings accordinglyIn an ideal situation, your employer would withhold the exact amount from your paycheck that you'll owe in taxes at the end of the year, resulting in no refund or payments to make to the IRS. Unfortunately, that's not practical, because everyone's deductions are different, and your income can potentially vary throughout the year.
However, the goal should be to estimate the amount you'll owe as closely as possible. If you calculate your withholdings, plug the amount into a tax calculator, and it looks like you're going to owe money, it might be a good idea to visit your HR department and ask to increase your withholdings. On the other hand, if you anticipate a big tax refund, your employer may be withholding too much from your paychecks.
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