When you receive a paycheck, you will see amounts “withheld” from your wages for Federal and State income tax and for Social Security / Medicare. Sometimes these are coded with acronyms like FIT, Fed W/H, S W/H, FICA, Med etc. Regardless of the label, it is an amount withheld from your wages for estimated tax payments.
If it was not withheld, you would have to write a check to the IRS, Social Security and the State Tax Commission with each paycheck. Withholding makes it simple but is removes the pain of having to actually write the check and appreciate how painful it really is.
Withholding for Social Security and Medicare is set at 6.2% and 1.45% – This withholding is the actual employment tax, so there is never an excess amount taken from your pay unless you have more than one job and make something over 120K between the jobs.
The Federal and State Withholding are ESTIMATED payments based on the W4 form that you complete with your employer. Most states use the Federal W4 form to determine their withholding, but some like AZ and CA have their own.
Since WITHHOLDING is an estimated payment and not the actual tax, one can overpay their tax obligation during the year. When that happens, the taxpayer receives a REFUND when they file their return. If the withholding is too LOW for the income, the taxpayer will OWE on their tax return.
When someone works overtime or gets a bonus, the withholding % is higher than the regular pay due to reasons that I will discuss in later blog posts. When someone says that they are TAXED more when they work overtime or receive a bonus, they show that they misunderstand the system. The WITHHOLDING is more. WITHHOLDING is not the TAX. It just estimates the TAX due for the income earned on the paycheck. The actual TAX is determined when you file your annual tax return.