It's a system most everyone is familiar with: you work, you make wages, you pay taxes on those wages. Rinse and repeat. Personal income tax is a well-established part of our jobs – and our lives.
When you're looking at your paystub, it can be a shock to see how much is withheld in income tax before your take-home pay. What are all those withheld amounts? How are they calculated? Reasonable questions, and as a worker you have a right to know.
What is personal income tax?
Income tax is one of the most common forms of taxation around the world. Meaning, it's not unique to the United States.
Income tax is usually imposed at both the federal government and the state government. How much a person pays in income tax depends on how much money they make – specifically how much they make in a year. Taxes are calculated by the tax rate times the taxable income, and then collected by the IRS.
Income tax is used to fund a bevy of social programs, like education, military, and medical research. The idea is that we all, as citizens, should have the chance to benefit from the fruits of income tax through these social programs
How do income taxes work?
When you are first hired at your workplace, your employer should give you an IRS form W-4. When you fill this out and give it back to your boss, they'll use it to determine how much of your income to withhold for taxes.
Essentially, your employer pays your income taxes throughout the year by taking the withheld amount from each of your paychecks and using it to pay the IRS. That's why it's important to fill out your W-4 correctly – so that you don't withhold too little (and get a huge tax bill come April).
Not sure how best to fill out your form W-4? This handy calculator will help you figure out just how much to withhold.
What if I need help?
That's what we're here for. At World Finance, our tax pros work year round to stay up-to-date on tax updates and practices. We'll help you make sense of your taxes – including your personal income taxes.