The Dos and Don’ts of Personal Income Tax

personal income tax discussion
Personal income tax is a tax that is paid from an individual’s income. When an individual receives their paycheck, a certain amount of the paycheck is withheld for federal, state, local, Medicare and Social Security tax.


These are several types of taxes that are typically withheld. It is also important to remember that with each type of tax, the employee pays one half and the employer pays the over half to the government.


Federal Tax

Withheld federal tax is sent directly to the IRS on behalf of the employee. An employer will withhold this amount from the paycheck for each pay period. Federal tax can differ depending upon each individual. The main reason for this is due to the W-4 form. When employees are hired, they fill out a W-4 form. The W-4 form specifies information such as an employee’s filing status, the number of dependents they have, as well as other adjustments.

State Tax

Some states have a state income tax. Not every state in the United States has an income tax, however, some do. In the event the state you work in has an income tax, it is important to understand how it works. State income tax will also be based upon your state W-4 form. The W-4 form will indicate to your employer how much to withhold from your paycheck. If you happen to work in one state, and reside in another, there are a few options. In this scenario, the employee would owe taxes in two separate states. If this is the case, the employee should ask their employer to withhold taxes for the state they reside in as well as additional taxes for the state the work in.


Local Tax

Similar to state tax, local tax applies to a specific city. Not all cities have a local income tax. For example, local tax can apply to a certain school district. If you reside in a specific school district, you may have to pay local tax, even if you don’t work within the district.


Medicare Tax

Medicare tax is a type of tax that is withheld from every employee’s paycheck for current Medicare beneficiaries. Medicare tax is withheld at a rate of 1.45% of an employee’s gross income. Medicare tax does not have a limit, therefore all wages are subject to the tax, regardless of how much gross income is generated. Employers are required to withhold an additional 0.9% of Medicare tax on income greater than 200,000 annually.


Social Security Tax

Social security tax is a type of tax that applies to all employee’s paychecks. Social security tax benefits retired employees that earned a specific amount over 40 quarters. This allows employees to be eligible for social security benefits when they retire. Every employer is required to withhold 6.2% of an employee’s income for social security tax. The limit for this is $137,700 as of 2020. Employers also pay 6.2% of the social security tax.