What is federal income tax withholding?

Every time you get a paycheck, your employer withholds, or sets aside, taxes based on the information you provided on your Form W-4 when you first started your job.

Your Form W-4, also known as your Employee’s Withholding Certificate, provides financial details that allow your employer to deduct the correct amount of federal income tax from your pay.

If not enough federal tax is withheld, you’ll owe the IRS money and may have to pay a penalty, depending on the size of the shortfall. If too much is deducted, you’ll be owed a tax refund.

When any big changes happen in your life — you get married, have a child, or get a big raise, for example — you will need to update and resubmit your W-4 to your employer so your paychecks can be adjusted accordingly.

In recent years, the IRS redesigned Form W-4, and the changes have meant disappointing refunds for some taxpayers. Even if your financial situation stayed the same in 2021, H&R Block recommends that you review your W-4 on a regular basis.

Some of the changes to Form W-4 included the elimination of withholding allowances, one new blank for income that doesn’t come from jobs, and another that allows you to factor in likely deductions.

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How your federal income taxes are calculated

The actual amount of federal income tax that’s deducted from your paycheck is based on your income and information from your W-4, such as whether you file as a single person or with your spouse, and whether you’re claiming any dependents.

The calculation also takes into account the tax brackets your income falls into. Under America’s progressive tax system, chunks of your income are taxed at different rates.

2021 tax brackets

These are the federal tax brackets for the taxes you’ll file in 2022, on the money you made in 2021:

  • Income amounts up to $9,950 (singles) / $19,900 (married couples filing jointly): 10%
  • Income amounts over $9,950 / $19,900: 12%
  • Income amounts over $40,525 / $81,050: 22%
  • Income amounts over $86,375 / $172,750: 24%
  • Income amounts over $164,925 / $329,850: 32%
  • Income amounts over $209,425 / $418,850: 35%
  • Income amounts over $523,600 / $628,300: 37%

What is FICA?

Another deduction that you’ll likely see on your paycheck is for the Federal Insurance Contribution Act (FICA).

Your FICA tax contributions are shared between you and your employer and support the Social Security and Medicare programs that you’ll rely on during your senior years.

From each of your paychecks, 6.2% of your earnings is deducted for Social Security taxes, which your employer matches. You pay the tax on only the first $147,000 of your earnings in 2022; any income exceeding that amount will not be taxed.

For Medicare taxes, 1.45% is deducted from each paycheck, and your employer matches that amount. Unlike Social Security, Medicare is fully taxed on all of your income, and if your earnings exceed $200,000 you’ll pay an additional 0.9%.

In general, FICA contributions are unavoidable, although exemptions are available to a few select groups including:

  • Certain religious sects.
  • Foreign government employees.
  • Others who are not American citizens but are earning money in the U.S.
  • Students working at the schools where they are enrolled.

If you think you might be exempt from making FICA contributions, it’s worth discussing the issue with your employer.

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Other tax deductions

In addition to federal income tax and FICA, you may be subject to other paycheck deductions as well, such as for state and local taxes, or contributions to your company health insurance plan.

You might opt to have a portion of each paycheck diverted into a pre-tax retirement savings account, such as a 401(k), a 403(b), or a traditional IRA.

Although making contributions to your company’s 401(k) will result in a smaller paycheck, your yearly tax bill will be smaller, too, because you’ve reduced your taxable income.

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About the Author

Shane Murphy

Shane Murphy

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Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

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