Reference: Federal Employee Tax

LOWEST TAX BRACKET ON INCOME OVER:
SECOND TAX BRACKET ON INCOME OVER:
THIRD TAX BRACKET ON INCOME OVER:
FOURTH TAX BRACKET ON INCOME OVER:
FIFTH TAX BRACKET ON INCOME OVER:
SIXTH TAX BRACKET ON INCOME OVER:

FICA WAGE AND TAX LIMITS, FEDERAL INCOME TAX & WITHHOLDING, & INFOLINKS

FICA Tax and Taxable Wage Limits

$87,900.00
6.2%
$5,449.80
NO LIMIT
1.45%
NO LIMIT
7.65%
$6,724.35

$90,000.00
6.2%
$5,580.00
NO LIMIT
1.45%
NO LIMIT
7.65%
$6,885.00

SOCIAL SECURITY TAXABLE WAGE LIMIT
SOCIAL SECURITY TAX RATE, EE SHARE
MAXIMUM SOCIAL SECURITY TAX
MEDICARE TAXABLE WAGE LIMIT
MEDICARE TAX RATE, EMPLOYEE SHARE
MAXIMUM MEDICARE TAX
FICA TAX RATE (SS & MED COMBINED), EE SHARE
TOTAL FICA TAX UP TO SS TAXABLE WAGE LIMIT

$94,200.00
6.2%
$5,840.40
NO LIMIT
1.45%
NO LIMIT
7.65%
$7,206.30

For a definition of FICA and other payroll terms, see the PayTemps Dictionary.

The following is written in a concise and broad manner so as to provide the reader with a general understanding of the topic, and as such, should not be cited in lieu of legal counsel or authority.

Federal Income Tax Rates 2006

The Tax Rates. Federal income taxes are more complex than FICA taxes because the income tax rate is not a fixed rate (like 7.65%), but rather, is a progressive rate. A progressive rate is a rate that increases as the taxed income increases. The above chart shows the different tax rates applied as income increases. Depending on how much taxable income an individual has in a tax year, an employee could be subject up to six different tax rates simultaneously in 2006. This is why there is no 'one' tax rate for income tax withholding. Instead, for most workers, the first earned dollars are not taxed at all (fall under some exemption). Then, after a certain amount of taxable income, the 10% rate kicks in on that additional income, and so on. Once an employee reaches the highest rate, all additional income is taxed at the highest rate (35% in 2006).

Tax Rate vs. Withholding Rate. The above chart is for actual tax rates on true, taxable income, after subtracting all tax exempt deductions, claimed allowances ($3,300 for each), and the claimed standard or itemized deductions. By contrast, IRS withholding rates, which are only broken down by Single/Head of Household or Married, are not the true tax rate, just an estimation of tax due. Withholding rate tables are different in that one subtracts the tax exempt deductions and claimed allowances, but not the standard or itemized deductions, before using the charts. This is because there is no way to know in advance what standard or itemized deduction will be claimed at the end of the year. Thus, withholding charts take into account that the first dollars will be exempted from tax by the standard deduction or itemized deductions.
The Marginal Tax Rate. An employee's marginal tax rate is the highest rate to which their income is subject. For example, if an employee's income is falling subject to the first three tax brackets in 2006 (0%, 10%, and 15%), their marginal tax rate is 15%. In other words, each additional taxable dollar they earn is subject to the 15% tax rate, and should be withheld at that rate.

$2,650.00
$10,000.00
$32,240.00
$73,250.00

$156,650.00

$338,400.00

above

to
to

to
to
to
to
and

NO WITHHOLDING 0%
LOWEST WITHHOLDING RATE OF 10%
SECOND WITHHOLDING RATE OF 15%
THIRD WITHHOLDING RATE OF 25%
FOURTH WITHHOLDING RATE OF 28%
FIFTH WITHHOLDING RATE OF33%
HIGHEST WITHHOLDING RATE OF 35%

$0.00

$2,650.01

$10,000.01
$32,240.01
$73,250.01

$156,650.01

$338,400.01

$0
$735.00
$4,071.00
$14,323.50
$37,675.50
$97,653.00
$97,653.00+

Withholding Table for Single

2006 Annual Taxable Wages

$0
$735.00
$3,336.00
$10,252.50
$23,352.00
$59,977.50
$97,653.00+

$0.00

$7,550.00

$30,650.00

$74,200.00

$154,800.00

$336,550.00

$0.00

$10,750.00

$41,050.00

$106,000.00

$171,650.00

$336,550.00

$0.00

$15,100.00

$61,300.00

$123,700.00

$188,450.00

$336,550.00

$0.00

$7,550.00

$30,650.00

$61,850.00

$94,225.00

$168,275.00

Annual Taxable Income by Filing Status

Applicable Tax Brackets

Calculating Annual Withholding. For discussion purposes, we show the above chart for the annual withholding rate for Single/Head of Household status for 2006 (the annual chart for Married status is not included here). Again, it is important to remember, as noted above, that witholding rates are not exactly the same as actual tax rates. Using the above chart, annual withholding amounts can be calculated, after subtracting tax exempt deductions and $3,300.00 for each claimed Withholding Allowance. For example, take an employee filing a Form W-4 as Single, with 2 claimed allowances, and $26,600.00 in taxable income, after subtracting tax exempt deductions. Subtract $3,300 for each allowance (2) for a total of $6,600.00. This leaves $20,000. The first $2,650.00 has no withholding. The next $7,350.00 has withholding at 10%, for a total of $735.00. The next $10,000 would be withhleld at 15% since it is over $10,000.00, but less than 32,240.00, for a total of $1,500.00. Total annual withholding is $2,235.00.

Withholding Per Payroll. Under the above example, if the employee was paid once a month, then their monthly taxable income would be $2,216.67 ($26,600.00 / 12), and withholding per month would be $186.25 ($2,235.00 / 12). Thus, the per pay period withholding rate is always based on what the annual total taxable wages are expected to be. The complete withholding rate tables to be used by employers for how much they should withhold from their employees' wages for federal income taxes can be found in

Federal Insurance Contribution taxes are evenly split between employer and employee shares. In effect, the true total tax is double the employee share. When an employee exceeds the Social Security wage limit, but changes employers, the new employer, unless it is a related taxed entity, cannot take credit for the Social Security taxes already paid by the previous employer (click this link forIRS Cir E info). However, the employee can get a refund on the Social Security taxes paid above the wage limit when filing his or her Form 1040 tax return for the year (for more on this and other FICA tax information, click this link for IRS FAQ on FICA).

10%

15%

25%

28%

33%

35%

Bonus or Supplemental Withholding

Bonus or Supplemental withholding is simply withholding on income that is above and beyond what an employee normally receives per pay period. Because a bonus may be a large sum paid in one pay period, and automated tax withholding is based on assuming that what you are paid in a pay period is the same for every pay period, a $1000.00 bonus for a monthly payroll will look like $12,000.00 annual raise. To calculate the correct amount of withholding, the system for a monthly payroll would have to do the following:

1) Add the bonus to the annual wages.
2) Calculate the total withholding for the year, including the bonus.
3) Subtract the total to be withheld for the year from what will be withheld for the year for base pay only.
4) The result of step 3 becomes the withholding for the bonus. Add this amount to the normal withholding for the payroll period.

To simplify withholding on bonuses or other supplemental pay, the IRS (and most states) allows the use of a flat rate of 25%. The 25% rate is the marginal tax rate for most employees, so the amount will be appropriate for most. However, for employess expected to receive $1,000,000.00 or more in taxable compensation in a tax year, the bonus or supplemental withholding rate is 35%.

$97,500.00
6.2%
$6,045.00
NO LIMIT
1.45%
NO LIMIT
7.65%
$7,458.75