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How Do I Calculate Income Taxes?

by rlcoch01 last modified Oct 31, 2007 10:39 PM

You don't have to calculate the income taxes that are withheld from your paycheck.  That's your employer's job. It's probably a good idea for you to check your employer's math, though, to make sure the right amount is being withheld.

There are several different methods your employer can use to figure out your federal income taxes.  Your employer gets to choose which one to use.  The two most popular are the wage-bracket method and the percentage method.  Using either one, your employer bases your federal withholding on tables issued by the Internal Revenue Service.  These tables take into account your marital status (married or single), how often you're paid (biweekly, monthly, etc.), your gross pay, and the number of withholding allowances you claim on your W-4 form.  State and local governments that levy income taxes have their own tax withholding tables for your employer to use.

Other withholding methods--For special situations, there are other withholding methods your employer can use.  For example, "supplemental wages" get special tax treatment.  These are amounts added on to your regular wages, and include bonuses, awards, commissions, overtime pay, tips, back pay awards, and severance pay.

Your employer can withhold federal income tax from these payments at the flat rate of 25% in 2007.  This is called the flat withholding rate method.  The 25% applies no matter what the IRS tables say.

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