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Why didn't my tax-cut raise show up?
Dear Tax Talk,
I heard there was a tax cut effective July 1. I
have not seen a difference in my taxes, but fellow employees of mine
have said they have. I claim one on my taxes. I would like to know
if my employer has changed my dependents to zero because that is what
it seems like to me. What percentage should be taken out of my checks
if I am single and claim one?
Thank you,
Dayna
Dear Dayna:
The well-publicized tax cuts of 2003 trimmed the tax
rates several points retroactive to the beginning of the tax
year. The Internal Revenue Service produced new tax withholding
tables for employers to reduce the amount of federal income tax
taken from employee's paychecks.
Withholding tables are based on three things:
1. Marital status
2. Frequency of payroll
3. Number of allowances claimed
The tables also take into account the progression
of the tax
rates. The more an employee earns, the more tax that is applied
to the earnings. For example, if Kay earns $500 a week and Doug
$1,000 a week and all other factors are equal, both would have the
same tax taken out of the first $500 earned that week. Doug who
earned more than $500, however, has more taken out as a percentage
of the second $500 he makes than he would have had taken from the
first $500.
Now assume both employees are single, paid weekly
and claim no allowances. Kay who earns $500 should have $61 withheld
from her paycheck according to the guidelines on page 5 of IRS
Publication 15-T, New Withholding Tables. Doug, who earns $1,000,
should have $178 deducted from his paycheck. Doug's taxes are $61
on the first $500 (or $12.2 percent) and $117 on the next $500 (or
23.4 percent, practically double).
If you haven't seen a change in your paycheck while
fellow employees have, perhaps something is amiss. The only possible
explanation is that your employer is doing something wrong or you
don't make enough to have federal income tax taken from your check.
For example, if you look at page 5 of the tables, an individual
with one allowance has to make more than $115 to have $1 in federal
income tax withheld. If you're above this pay scale then you need
to review with your employer their method for deducting federal
income tax.
Also note that the withholding tables do not take
into account FICA taxes. FICA is short for the Federal Insurance
Contributions Act, the payroll tax that pays for Social Security.
FICA is 7.65 percent of a worker's gross pay including 401(k) deferrals
and is collected via withholding in addition to federal income taxes.
-- Posted: Sept. 10, 2003
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