I am confused about this, if you work for an employer and the tax rates are 10%, 15%, 25%, 28%, etc. is the amount withheld each week based on an extrapolation of what your annual income would be in a year based on that one paycheck, or is it based on your year to date earnings?
If you earn (as an example) $100 one week, then $2000 the next but your YTD earnings are 15k so far, would your federal income tax withholding for both weeks be calculated at 15% (since you are over 8500 but below 34500 YTD income) , or would it be 10% for week one and (up to) 28% on week two, since week two would extrapolate to $104,000 in annual salary and week one to $5,200?
There is a different chart/formula for each kind of pay period, or at least there used to be. I haven’t had to calculate withholding for employees for a long time.
Annual pay has nothing to do with the witholdings from your pay check. It is based on the gross pay in the current pay period times the rate for that specific period. Weekly, biweekly, Semimonthly etc payperiods have their own withholding tables.
But if your earnings are all over the chart ($200 one week, $3000 the next, etc) won’t your final income taxes be tabulated on a YTD basis when you do your annual taxes?
So even if you are in the 10% bracket one week, the 28% the next, the 15% the next, etc. if your total AGI is $X (say 40k), don’t they just compare what you would pay with 40k in AGI in federal income taxes ($6,125) and if you paid more than that over the year offer a refund?
Yes, when you file everything is based annually but throughout the year withholding is based on a per period calculation. That is why people often say “man I got a big bonus but got screwed on taxes” or “my last job paid out my vacation days but Uncle Sam took almost all of it.” What happens is payouts like that make a regular semi-monthly paycheck or a monthly paycheck look like you are earning six figures and can cause withholding at a much higher than normal rate. At the end of the year all that matters though is what taxes you actually needed to pay the government, and that is based on your AGI.
In effect the witholding tables assume you will make the same amount every week or month or whatever.
Example:
If you’re paid weekly and make $500/week, the table gives a weekly amount to be witheld that will result in you having enough taxes witheld on a $26,000 annual income (52 weeks at $500 per).
If you’re paid $1000 a week, the table gives a weekly amount to be witheld that will result in you having enough taxes witheld on a $52,000 annual income (52 weeks at $1000 per).
So yes, if you have a wildly fluctuating income but paid at a constant interval, then the effect over the course of a year is to withold some amount in excess of what’s appropriate for your actual annual total income.
The fix is to increase your witholding allowances a bit. Or change whether you’re witholding as single vs married.
Because the tax system isn’t all *that *progressive, the actual amount of overwitholding isn’t that significant unless you get to something really silly like making $100K a year via 2 weekly paychecks of $49,000 each, and 50 weekly paychecks of $40 each.
In each of my examples I’ve talked about weekly paychecks, but the same issue applies to any other pay frequency. Or even to variable pay frequencies.
Bottom line: The witholding tables assume each paycheck of your year will be the same.