COPYRIGHTED MATERIAL
Taxes, Taxes, Taxes… It’s been said that the only certain things in life are death and taxes. The shrinking paycheck certainly confirms at least part of this. Federal, state, and often local governments all get a piece of your paycheck pie before you see any of it. They collect their money through tax withholdings made by the employer. The following taxes are withheld from paychecks: Federal Income Tax. The Internal Revenue Service (IRS) is the U.S. government agency responsible for collecting federal income taxes. The IRS requires employers to withhold income taxes from an employee’s gross pay. There’s no getting around it. Every pay period, money for income taxes is taken out of an employee’s paycheck and paid over to the IRS by the employer on behalf of the employee.
Fin Lit Trivia Fin Lit Trivia Fin Lit
U.S.A. U.S.A. U.S.A Income tax rates vary hugely between countries. At an average rate of 42%, Belgium has the the highest income tax rate, followed by Germany and Denmark. At an average of 22.7%, the U.S. ranks 8th, just behind the U.K. Source: OECD
State Income Tax. Most states require an employer to withhold state income tax from an employee’s gross pay. There are seven states that do not require residents to pay income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If you happen to live in one of those states, congratulations, you pay only federal income tax. Social Security Tax. Recall from the last lesson that Social Fin Lit Trivia Fin Lit Trivia Fin Lit PRODUCT PREVIEW Security is a federal government entitlement program created under the Federal Insurance Contributions Act (FICA) . Under FICA, an employer is required to withhold Social Security tax from their employee’s paychecks. For this, employers deduct a flat rate of 6.2% of the employee’s paycheck right off the top . The employer pays a matching 6.2%. Get this: Contributions are not reserved in an account for the benefit of the employee. They are immediately paid out in benefits to currently retired workers. Freelancers pay Social Security tax as part of their “self-employment” tax. Medicare Tax. FICA also requires employers to deduct taxes for Medicare , which a federal healthcare program for people over 65. Everyone who earns a paycheck in the U.S. pays at least 1.45% of their earnings to Medicare tax . The employer pays another 1.45%. Again, these deductions are not set aside for the benefit of the employee. They are immediately paid out to support current Medicare recipients. State Disability Insurance Tax. Recall that California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico have state-required disability benefits to provide an employee with compensation in the event they get sick or injured away from their job . In those states, employers are required to withhold a tiny percentage (usually less than 1%) of an employee’s earnings and pay it over to the state’s SDI fund. Local Taxes. Most U.S. cities and counties do not charge a local income tax, relying instead on property and sales taxes to raise revenue. However, some may impose a municipality tax to fund civic improvements such as building a local library or making water quality improvements. If so, they will be deducted from a paycheck. Usually these are very small amounts. Who’s dumb idea was that? The first modern income tax was introduced in 1798 by Prime Minister William Pitt the Younger, to pay for Britain’s war against France.
85
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
Made with FlippingBook - Online catalogs