A Comprehensive Guide to Understanding Federal Income Tax Withholding (FITW)
For an employee, it can be very difficult to understand the different taxes and deductions that are made from their wages. However, every country has certain taxes that are directly deducted from the salary of employers, and one such term that you need to know is FITW, also known as Federal Income Tax Withholding. Now, if you are not sure what is FITW Tax, then this guide is the place where you will get to know everything about it.
Understanding the Meaning of Federal Income Tax Withholding (FITW)
Federal Income Tax Withholding, or simply known as FIT withholding, is a part of an employee’s gross wages that the employer deducts from every paycheck. In simple terms, your employer will deduct a specific part of the employee’s salary and forward this amount to the Internal Revenue Service (IRS). This amount is used as a prepayment for their annual income tax liability.
Along with the FITW meaning, you should also know that the amount that is withheld varies based on two different factors: the earnings of the employee and the details that are entered in their Form W-4. Details such as the filing status, dependents, and other adjustments are a part of the Form W-4.
Since the FITW tax is a withholding tax, it is a mandatory payroll deduction that every employer must identify on the pay stub of an employee. You can also see other mandatory withheld taxes on your pay slip, such as Medicare, Social Security, and state or local income tax, depending on the country you are residing in.
How does the FITW work? How much Federal Income Tax is withheld?
Now that you know properly what is FITW on my paycheck, you should take a look at the workings of FIT withholding. This will provide you with more information about the tax and the way it is calculated.
Once employers deduct federal income tax, employees are able to examine the FITW on their paycheck stubs, applicable to both the current pay period and the entire year. At the conclusion of the year, the federal W-2 Form provides a summary of an employee’s total earnings and the taxes that have been withheld.
Taxpayers subsequently utilize this data to submit their annual tax returns and ascertain if they have overpaid or underpaid.
As we have already mentioned, the federal income tax withholding rate depends on the income of the employee and other factors. At present, there are seven different income tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) that apply to larger income tax rates. As your income increases, your tax rate will also increase.
However, you should also know that the tax rate will be based on the income that falls under that specific tax bracket. This means that for a person earning $75,000, the tax bracket for that person will be:
- 10%: $0 – $10,000
- 12%: $10,001 – $40,000
- 22%: $40,001 – $80,000
Rather than having a 22% tax rate for your entire income, your income will be divided and taxed according to the tax brackets that we have mentioned here