Every year, mailboxes all over the US are overflowing with tax forms. Occasionally, those tax forms go straight to a certified accountant, other times, taxpayers devotedly open these forms and patiently fill out the necessary information in each box. In many cases, it is common for taxpayers not to fully understand the meaning of all the numbers, letters and other data on these forms. So, let us dissect this tax form on here and answer the question of how 8:00-5:00 workers pay taxes.
Basically, employers are required by the IRS to report employees’ wage and salary information on a Form W-2. This W-2 likewise shows the amount of federal, state and other taxes withdrawn from your take-home pay. As a worker, the data written on your W-2 is particularly vital in the preparation of your tax return. To assure you that you have it without delay, the IRS demands your employer to mail you a W-2 not later than January 31 subsequent to the end of the tax year or December 31.
Form W-2 is based on dollars and nothing else. Not how much time was spent to work nor the position held. Just dollars earned. All employers who pay as a minimum $600 must issue a Form W-2. If any taxes were withheld, including those for Social Security or Medicare, a Form W-2 must be issued despite the amount of cash paid out to a worker.
Within Form W-2
An employer puts in order 6 copies of the W-2 form for each employee. The employee gets 3 copies. The 3 copies must be issued by January 31 of every year. On the left side of the form shows taxpayer information while on the right side show the financials and codes. At the bottom of the form, we can see all local and state tax information.
Box 1 contains your overall assessable earnings, tips, prizes and other reimbursements, over and above other chargeable fringe benefits. It does not take account voluntary deferments to retirement plan schemes, pre-tax profits or payroll deductions. Since the figure does not cover the aforementioned amounts, it will be lesser than the amounts that will be seen in Boxes 2 and 3. It is the figure many taxpayers really care about the most.
In Box 2, the total amount of federal income taxes withdrawn from your paycheck during the year will be shown. On the other hand, Box 3 will show the total wages that has been subjected to the Social Security tax. This figure is computed before any payroll deductions, this means that the amount in Box 3 is higher than what is shown in Box 1. Or it could also be lesser if you are a high-wage earner.
Box 4 shows the entire Social Security taxes withdrawn for the year. In contrast to the federal income taxes, Social Security taxes are computed based on a flat rate which is 6.2%. Thus, Box 4 should contain a figure that is equal in the amount contained in Box 3 then multiply it to 6.2%.
Box 5 shows earnings subject to Medicare taxes. Normally, Medicare taxes do not cover any pretax deductions and will consist of most chargeable benefits. Unlike Social Security remuneration, there is no cap for Medicare taxes, this means that the figure in this Box may be bigger than the firgures shown in Box 1 or Box 3. Actually, it’s probably the biggfest number on your form W-2.
In Box 6, we see the amount of Medicare taxes withheld for the year. Just like the Social Security taxes, Medicare taxes are based on a flat rate which is 1.45%. But under a new law that was promulgated at the start of 2013, the employer must withhold supplementary Medicare tax amounting to .9% from a worker earning over $200,000, not considering the filing status or the salaries paid by another employer. Since your employer is not fully aware of your actual economic scenario, there is a possibility that under the new law, you may have to pay additional Medicare taxes than your withholding depending on filing category, reimbursement and self-employment earnings.
Withholding Tax – What it is
This is the income tax withdrawn from workers’ take-home pay and is paid directly to the government by the employer. Or if you’re a non-resident, this is the tax levied on your income, in the form of interests and dividends from securities.
Your withholding is composed of 3 inherent bits of data about you and these are —
If the rate you are using is the married or single fee
The allowances you are qualified for
Whether or not you want to withhold extra
Some changes in your domestic situation can also have instantaneous effect on your tax payments. Examples of these are when you get married, or if already married, when your spouse no longer has a job (for whatever causes) or when a child is born. In these instances, it is advisable to change withholding so as to avoid owing a huge amount of tax bill or to basically borrow from the government additional money at zero interest.