Calculating Income Tax
Benjamin Franklin was quoted as saying “in this world nothing can be
said to be certain, except death and taxes.” Income tax is one of the
certainties of life, so we better know how taxes work. In the United
States, a person is taxed based on that person’s gross income
according to a graduated tax table. An example of an income tax table
is shown below.
Federal Income Tax Table
Tax Rate
Single
Married Filing Jointly
10%
not over $8,025
not over $16,050
15%
$8,025 – $32,550
$16,050 – $65,100
25%
$32,550 – $78,850
$65,100 – $131,450
28%
$78,850 – $164,550
$131,450 – $200,300
33%
$164,550 – $357,700 $200,300 – $357,700
35%
over $357,700
over $357,700
Example
Let’s say after college you get a job that pays an annual salary of
$32,000. Your friend gets a job that pays an annual salary of
$33,500. Assuming both of you file as single and have no other
deductions, what is the net annual pay for both you and your friend
after income taxes are deducted?
Answer: First, determine which tax bracket you and your friend
belong. You are in the bracket highlighted in light yellow, and your
friend is in a higher tax bracket (highlighted in light purple).
Tax Rate
10%
15%
25%
28%
33%
35%
Single
not over $8,025
$8,025 – $32,550
$32,550 – $78,850
$78,850 – $164,550
$164,550 – $357,700
over $357,700
Married Filing Jointly
not over $16,050
$16,050 – $65,100
$65,100 – $131,450
$131,450 – $200,300
$200,300 – $357,700
over $357,700
Amount of taxes you owe: 0.15($32,000) = $4800
Amount of taxes your friend owes: 0.25($33,500) = $8375
Your Net Pay: $32,000 – $4800 = $27,200
You Friend’s Net Pay: $32,000 – $4800 = $25,125
Thus, you have a higher net income than your friend.
© LaurusSoft, Inc. 2010
Everyone who has a job enjoys payday, the day they receive their
check for the work they have done. Some employers pay weekly (52
paychecks), some pay on the 1st and 15th of each month (24
paychecks), or some pay over 26 pay periods (26 paychecks). It
depends on the job and the employer. We are going to take a closer
look at a paycheck, and all of the deductions that come out of it.
Paycheck Deductions
There are several deductions that must be taken out of your paycheck
each pay period, including federal income tax, state income tax
(depending on state), and FICA (Social Security & Medicare). There
are other deductions you can voluntarily withhold from your paycheck
including IRA contributions, medical savings account contributions,
insurance, and charitable donations. Some of these contributions can
be made pre-tax, or before your income tax is calculated. We are
going to take a closer look at the mandatory deductions from your
paycheck.
•
•
•
Federal income tax – you fill out a W4 to determine the amount
to withhold
State income tax – you choose what percentage of your federal
withholdings you want withheld for state (Arizona has an A-4
form)
FICA – you pay 7.65%, your employer pays 7.65% for the full
15.3%
Example
Robert has a job that pays an annual salary of $50,000. Robert his
filed as a single, and has no additional deductions. On his state
withholding form, Robert has chosen 24.5% of his federal withholdings
to be withheld for his state income tax. If Robert is paid bi-weekly )26
equal payments), what is his net take home pay for the two weeks
after all deductions?
Answer: First, calculate the gross amount of each paycheck:
$50, 000
= $1923.08
26
Now, calculate the amount of federal income tax Robert owes on each
check. Since he makes $50,000 per year, his income falls in the 25%
tax bracket. So his federal income tax is:
© LaurusSoft, Inc. 2010
$1923.08 ( 0.25) = $480.77
Since Robert chose his state withholding to be 24.5% of the federal,
his state taxes withheld are:
$480.77 ( 0.245) = $117.79
Finally, since FICA is 7.65% of gross pay, his FICA withholding is:
$1923.08 ( 0.0765) = $147.12
His total deductions are $745.68 ($480.77 + $117.79 + $147.12).
Thus, Robert’s net pay each pay period is $1177.40.
© LaurusSoft, Inc. 2010