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The more allowances a
taxpayer claims, the lower
the amount of income tax
withheld from earnings.
A taxpayer is usually
allowed one personal
allowance and one allowance for each person he
or she supports (such as a
Some employees are
exempt from federal income
tax withholding. An
employee is not required to
have income tax withheld
if he or she did not have a federal income tax liability in the previous year,
expects no tax liability this year,
has income of $700 or less including nonwage income such as savings
account interest, and
cannot be claimed as a dependent on someone else’s tax return. An exempt employee writes EXEMPT on Form W-4 so the employer will
know not to withhold federal income tax.
Tax Tables. An employee’s gross earnings affect the amount withheld
for federal income taxes. Most employers use IRS tables to determine the
amount of federal tax to withhold. See Figure 12 – 4 for tables for single and
married persons paid weekly. Other tax tables are available.
Let’s use the tables to determine the tax withheld for Emily Kardos. She
is single and claims no allowances. For the week ending June 30, she earned
$243. This amount falls between $240 and $250 on the tax table for single
persons. Reading across this line to the column for zero withholding allowances, you find that $29 is withheld from Emily’s gross earnings. Social Security Tax
Employers also collect social security taxes for the federal government.
Established by the Federal Insurance Contributions Act (FICA) in 1935,
social security taxes are often called FICA taxes. FICA taxes have two components: social security and Medicare. Each is listed separately on payroll
records. The social security tax funds programs that provide income to
1. The old-age and disability insurance programs provide income to
people who are retired or disabled and their dependent children.
2. The survivors’ benefits program provides income to the spouse and
dependent children of a...
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