W-2 Tax Calculations

By Jack Ori

If you work for an outside employer, your employer must withhold federal and state taxes from your paycheck each pay period. Your W-2 reflects your withholdings for the entire year. Use these amounts to calculate your tax refund or tax owed for the year. You can use an online withholding calculator (see Resources) to determine how much tax you are likely to pay through withholdings.

Factors

How much tax employers withhold from employee's paychecks depends on how many withholding allowances each employee claims. The more withholding allowances an employee claims, the less money the employer may withhold for payroll taxes. Employees claim exemption from withholding if they expect to make less than the minimum amount for their filing status .

Considerations

If an employee does not claim enough withholding allowances, his employer withholds far more money from his paychecks over the course of the year than he owes in federal and state taxes. The employee then gets a large refund when he files his taxes in April. However, he does not have access to this money during the course of the year. If the employee pays less than 90 percent of the tax she owes through withholding, however, she must pay a penalty for underpayment of tax or pay estimated taxes on a quarterly basis. Thus, employees should calculate how much tax they are likely to owe prior to filling out their initial W-4 and file an amended W4 the following year if they pay too much or too little tax throughout the year.

Approximating Payroll Taxes

The federal government requires you to pay approximately 7.65 percent of your income in Social Security and Medicare taxes as of 2011. If you make more than $108,500, you pay Social Security taxes on only the first $108,500. Thus, you can estimate how much money should be withheld from your paycheck using these tax rates.

Tax Calculators

The Internal Revenue Service and some private accounting companies offer online tax calculators. These calculators determine how much tax employers should withhold based on your filing status, income level and number of dependents. Using an online tax calculator helps you estimate how much federal tax you will pay through withholdings if you take the maximum number of withholding allowances you are entitled to. Your W-2 amounts may vary based on the number of actual allowances you claim.

About the Author

Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.