 In this discussion we will discuss the discussion question of, how is federal income tax FIT withholding calculated? So the FIT withholding, the federal income tax withholding, is one of the more complex or the most complex withholding to calculate, more complex than things like social security and Medicare because it's based on a progressive tax system rather than just a simple flat tax system. Meaning when we calculate the social security and Medicare, we in essence just take the wages whatever we have to adjust the wages to whatever the Medicare wages or social security wages but once done, we just take that number and multiply times the rate that is given one rate and that'll give us the amount of tax and that'll be easy to do. The federal income tax however, we have to use tables for or percentage method in order to figure out the federal income tax. This is pretty easy to do if we have a computer to do it because it can do that type of calculation fairly quick but it's still a bit complicated because if we want to do projections into the future and calculate what would happen with wage changes and whatnot, we probably don't have a fairly good understanding. Most people don't about what the federal income tax is and how it's being calculated and therefore projections and things like that can be a bit more confusing. So to do the federal income tax calculation more by hand, we could use tables or we could use a percentage method. In essence, what they're all doing if we use a table or percentage method or if the computer just spits out a number for us, what it's really doing is it's using a progressive tax system and applying the tax that will be on a stepped up system. So we're gonna have the first amount of dollars not taxed and the second amount of dollars taxed at a higher rate, the next amount of dollars at a higher rate and then have whatever the higher tax bracket is, meaning the same type of wages are being taxed at multiple different rates for the same withholding. There's a couple ways we can we can figure that out. One is that we can use what's the circular EU IRS provides us with tables that can help us to figure this out. In order to use the tables, we will need some information including the marital status of the employee. We're gonna need the number of allowances and we're gonna need the pay period, meaning is it weekly, bi-weekly, semi-monthly or monthly and then we can we can look up the table. Note that you know those types of variables will kind of mirror you can kind of tie them out to what will happen at the end of the year when we file our form 1040 individual tax return because this FIT will be reported to us on reported to the employees on the W2 form and so what we're really doing is figuring out that withholding how much is going to be paid from the W2 which we will then report on our 1040 as employees at the end of the year. So if you think about your 1040 of course you need to know your marital status because that's going to affect the tax bracket that you're going to be in and it'll also affect possibly your exemptions and whatnot. You also need to know your number of exemptions which usually includes yourself your spouse any dependence and so the allowances kind of tie to that allowances are kind of mirroring that to a degree they don't have to be the same allowances and exemptions but you can think of them as somewhat related when we think of the of this of this relationship. Okay and so and then you need to know how much wages you have of course because as we know with our 1040 when the wages go up then we owe more money or we get into a higher tax bracket well the same is true when we withhold the information based on the brackets from a paycheck to paycheck perspective. So once we have that information we can go to the circular E if we want to figure out our withholding for a particular paycheck and we have to make sure that we get the right tables so if we get the right table there's going to be tables for each pay period there's going to be a lot of tables so there's going to be one for each type of pay period whether we are weekly whether we are bi-weekly whether we are semi-monthly or monthly so you have to look through all those tables and find the correct one of course once we have the correct one it'll be the same because if we're a bi-weekly pay period for example we will always be a bi-weekly pay period and we won't have to switch up the table but when you first look at them they can look quite intimidating and then we have to look to see if we're married or single so there's going to be two tables for each sex for each pay period for married and then single and then once we have that we can look up the amount period it'll it'll have brackets for different amounts that we fall into we'll have to find the correct range of income and once we find the correct range of income we locate the number of allowances related to it and find the correct column and that'll be that'll give us then finally the withholding amount for that particular paycheck for that particular employee now if if for example the wages are too high for us to find that on the tables then we can use what's called the percentage method which also can be found in the circular E and that is useful to do a few times even though it's a bit complex to do because it'll give us a better idea of how this calculation is actually working which would give us a better idea of you know to do projections and whatnot or what really happens when we get a raise in terms of taxes how is our taxes how are our taxes really going to go up and really it's the last dollars that we're getting that's going to be taxed at the higher rate so to do that we need to look we'd go back to the circular E we look at different tables and we would find a table that would give us one the number of allowance number allowance deduction amount depending on our pay periods again weekly bi-weekly monthly or semi-monthly and then we'll take whatever they give us on that table and that's kind of like our exemption amount or our allowance amount multiply times the number of allowances then take our federal income tax wages subtract that number from it and that's the number that we will then look on the table for to determine what the FIT will be it'll have similar kind of brackets that we'll find we'll find where that number falls into the ranges and we'll find the range where it falls and then what we need to do is really just calculate the the top level of the tax brackets so the highest tax bracket we're in we're going to calculate the tax on whatever dollars are in the highest tax brackets the rest of the dollars will be pre-calculated in the table meaning we're going to take whatever number we have from a prior calculation for our wages minus the lower limit in the range that we are in and that'll give us the dollars that will be taxed with the higher bracket multiply at times the higher bracket to number and that'll give us the amount that we're going to pay in the top tier bracket that we owe in then all prior tiers basically the table can figure that out for us because that's a fixed number so that the table can figure out exactly they can just tell us what the tax is as of the low end of the bracket the only thing it doesn't know is how many dollars we have earned within that particular top bracket we are in so we need to figure out how many dollars we earned in that top bracket multiply at times the rate and then add to it whatever whatever the table gave us for the prior brackets so that's that's in essence the fit calculation we can see it's a much more detailed type of cap calculation if we were to have to do it by hand obviously computers can help us out with that but it's it's useful to have some understanding of what it is one to to know what the calculation is two so that we know that when we do our our our budgeting and our effects to our tax planning most will have an idea of what happens when we if wages go up or wages go down what's gonna what's the what's gonna be the result in our withholdings to better do uh tax planning accounting i don't know anyone in accounting