All of an employee’s wages are subject to tax withholding, including federal income, Social Security, Medicare, state, and local income taxes. If an employee receives the same salary every payroll period, then he can anticipate what his net paycheck will be each time. On the other hand, if an employee’s wages vary because of changes in the number of hours worked or different rates of pay, then the employee often cannot predict what his take-home pay will be. The value of certain fringe benefits may also impact the amount of taxes withheld.
Social Security and Medicare taxes are a straight percentage of taxable wages, so these taxes are easily calculated. But Federal Income Taxes, most state taxes, and some local income taxes, are what are referred to as graduated income taxes. The tax rate increases if the individual earns more, and there are certain deductions and credits that must be considered as well. By focusing on how Federal Income Taxes are calculated, this article will explain how the process works.
How Does a Graduated Income Tax Work?
The principle behind a graduated income tax is that the more money an individual earns, the higher the tax rate. For instance, according to Internal Revenue Procedure 2009-50, in 2010 the first $8,375 of an individual’s income is taxed at 10%, the next $25,625 is taxed at 15%, the next $48,400 is taxed at 25%, and so on. On the other hand, the tax brackets for a married person or a head of household are different.
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