How is net income calculated?

How is federal income tax withholding calculated?

• How does the IRS determine the percentage of your gross paycheck to withhold? There seems to me to be a discrepancy here, because your tax bracket is determined by annual income, but you pay taxes as you go with each paycheck. Let's say your biweekly gross pay is $2,000. Does the government look at this number alone and say, "$2,000 = x percent withheld?" Or do they make a projection of your annual income based on that number, i.e. $2,000 every two weeks equates to about $52,000 annual income, which puts you in a certain tax bracket? Here's why I'm wondering: I'm starting a new job halfway through the tax year. I was a student before, so my income was almost nothing. If I were making the above numbers, my annual income "ought" to be $52,000, but I'm only working six months this year, so my actual annual income will only be $26,000. That puts me in a lower tax bracket, so is too much money going to be withheld from my paycheck this year? If so, should I add allowances so I don't get too much taken out?

• Answer:

  In essence, what you described is what happens.  There are different payroll periods (daily (other), weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, annually) and each payroll period has a different amount associated with it. The next part that is used to determine is if you marked single or married and number of allowances on your W-4. The last part that is used to determine the withholding amount is the amount you are paid during the payroll period. The calculations for the amount being withheld can be convoluted and difficult to understand because of the way the Circular E is written. Over          But not over                                                    of excess over $87            $436                      $0.00 plus 10%                $87 $436          $1,506                   $34.90 plus 15%               $436 $1,506     $3,523                  $195.40 plus 25%         $1,506 $3,523       $7,254                   $699.65 plus 28%             $3,523 $7,254       $15,667                 $1,744.33 plus 33%          $7,254 $15,667     $15,731                  $4,520.62 plus 35%         $15,667 $15,731                                    $4,543.02 plus 39.6%      $15,731 This is the chart from the current Circular E for a single person that gets paid bi-weekly and I'll do my best to explain how your taxes are calculated. Step 1: Subtract the number of allowances (according to pay schedule of bi-weekly) claimed on your.  For this instance, let's say you claimed only yourself so that would be 1.  The amount associated is $151.90. Step 2: Your bi-weekly earnings are $2,000 so subtract $151.90 which leaves $1,848.10 Step 3: Locate where $1,848.10 falls within the chart (see bold). This is where it gets confusing because you're going to use the information on the line where your wages fall and read from right to left (see below) when doing the calculations Step 4: Using the result from step 2 ($1,848.10) and subtract the amount in the "of excess over" column ($1,506) and this leaves you $342.10 Step 5: Multiply the result from step 4 ($342.10) by the percentage (in bold) from above (25%) and the result is $85.525 (rounded up to $85.53) Step 6: Add the amount on the same line in bold ($195.40) to the result from step 5 ($85.53) and this is the amount ($280.93) to be withheld Some payroll software will withhold dollars and cents whereas others will withhold only whole dollar amounts.  If the software being used to calculate your withholding rounds, the amount withheld will be $281. There is also a chart in the Circular E that makes the calculations easier and that can be found at http://www.irs.gov/pub/irs-pdf/p15.pdf. You asked if you're going to have too much withheld?  Technically the answer is yes because you will receive a refund (based on the potential of $52,000 annually).  You can change the number of allowances on your W-4 since you know that you'll only be making $26,000 this year (technically) and may only want to have enough taxes withheld to cover the amount you earn.