Chapter 2 Understanding Your Paycheck
60
The amount of money you earn
aff ects the amount withheld from your
paycheck because federal income tax
is a progressive tax. A progressive
tax means the more a person makes,
the higher the rate of taxation. Marital
status is another factor used when
calculating withholding. A tax table is
used to look up the amount of tax to be
withheld. Withholding taxes for single
employees is diff erent from withholding
taxes for married employees who fi le
taxes together with their spouses.
There is a tax table for single employees
and a separate tax table for married
employees who fi le jointly.
Withholding allowances are the number of dependents you have. The
number of dependents you have changes the amount of taxes withheld. A
dependent is a child or other person who you are supporting fi nancially. In other
words, they are dependent on your support. The more dependents you have, the
less tax will be withheld. When you fi le your tax return, your taxable income will
be reduced to account for the fact that you are supporting other people. Taxable
income is the portion of your earnings that is taxed when you fi le your tax return.
When you begin working for an employer, you will complete a W-4
withholding allowance certifi cate as shown in Figure 2-1. This form has a
worksheet to help you determine your withholding allowances. The fewer
allowances you claim, the more taxes will be deducted from your paycheck.
Sometimes employees think that
their net pay is the only money
they have earned. As a fi nancially
aware person, you should know that
even though some of your money
is withheld for FICA and income
taxes, it is still yours. You just don’t
have any control over where it goes.
The money deducted for FICA taxes is set aside for
when you retire. The federal and state income taxes
are the fees you pay for services like defense, law
enforcement, and the construction and maintenance
of highways. You should consider your net pay as the
earnings over which you have direct control.
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Financial
Smart$
Figure 2-1.
Form W-4
Source: Department of the Treasury, Internal Revenue Service
Cut here and give Form W-4 to your employer. Keep the top part for your records.
Form
W-4
Department of the Treasury
Internal Revenue Service
Employee's Withholding Allowance Certificate
▶ Whether you are entitled to claim a certain number of allowances or exemption from withholding is
subject to review by the IRS. Your employer may be required to send a copy of this form to the IRS.
OMB No. 1545-0074
20--
1 Type or print your first name and middle initial.
Last name
Home address (number and street or rural route)
City or town, state, and ZIP code
2 Your social security number
3
Single Married Married, but withhold at higher Single rate.
Note. If married, but legally separated, or spouse is a nonresident alien, check the “Single” box.
4
If your last name differs from that shown on your social security card,
check here. You must call 1-800-772-1213 for a replacement card.
▶
5 Total number of allowances you are claiming (from line H above or from the applicable worksheet on page 2) 5
6 Additional amount, if any, you want withheld from each paycheck . . . . . . . . . . . . . . 6
$
7 I claim exemption from withholding for 20--, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here . . . . . . . . . . . . . . . ▶
7
Under penalties of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief, it is true, correct, and complete.
Employee’s signature
(This form is not valid unless you sign it.)
▶
Date
▶
8 Employer’s name and address (Employer: Complete lines 8 and 10 only if sending to the IRS.) 9 Office code (optional) 10 Employer identification number (EIN)
For Privacy Act and Paperwork Reduction Act Notice, see page 2. Cat. No. 10220Q
Form
W-4
(20--)