The beginning of 2018 brought big changes in tax laws and adjustments to American workers' paychecks. While rates for Social Security and Medicare have stayed the same, federal withholding rates and tax brackets have been adjusted to provide larger take-home pay for most taxpayers.
Federal Tax Withholding
Federal withholding taxes are calculated based on gross income, the number of allowances claimed on a W4 and marital status.
Employers can use either the wage bracket method or the percentage method outlined in the IRS guide Publication 15 (2018) to calculate the amount of income tax to withhold.
The 2018 tables still utilize seven income tax brackets, although the percentages have been adjusted as well as the amount of income that can be earned within each bracket.
In general, rates have been lowered overall with the highest bracket dropping 2.6 percent from the previous year, reducing the 39.6 percent rate to 37 percent.
The amount of change between bracket levels has also been reduced. For example, the first four rate brackets were previously listed at 10, 15, 25 and 28 percents and have been adjusted to 10, 12, 22, and 24 percent.
The IRS encourages taxpayers to occasionally perform a withholding checkup to be sure that the correct amount is being withheld from their paychecks.
If too little is withheld throughout the year, taxpayers could face a big tax bill and possible fines when they file their return. Conversely, if too much is being taken out weekly, individuals will receive a bigger refund come year end.
However, instead of a large refund, taxpayers may prefer to adjust their withholding allowances so that they have more money in their paychecks on a weekly basis.
The IRS website offers an online calculator to walk taxpayers through the process so that they can determine if they should file a new W4 with their employer.
Federal Insurance Contributions Act Taxes
Social Security and Medicare taxes, also known as Federal Insurance Contributions Act (FICA) taxes, are another big deduction from paychecks. These rates are standard for every individual and are based on flat percentages, and do not fluctuate according to the level of gross income.
Every employee is taxed at 6.2 percent for Social Security and 1.45 percent for Medicare. These amounts are calculated and deducted from earnings after all pre-tax contributions to retirement plans or payments to cafeteria plans have been subtracted.
State and Local Taxes
Once the Federal government has taken its share, state and local tax authorities also take a piece of an employee paycheck. Tax rates vary from state to state with 43 states taxing individual income.
Tax rates range from a high of 13.3 percent in California to those in lower income brackets paying percentages less than one percent, in several states.
Local governments also tax at their own varying rates, levying those who live or work within their boundaries.