Tax Season Made Simple: Understanding Federal Tax Withholding
December 16, 2019
It’s never too early to start thinking about tax season. In fact, although many people think of tax season as a spring activity, tax season typically begins January 1st and ends April 15th. With this in mind, filing season might be sooner than you thought.
While most all of us commiserate about fulfilling this duty and have even done so multiple times, the finer details can still be confusing. Today, we aim to bring clarity on tax withholding and what this means for your tax return.
A brief tax overview
Conceptually, taxes can get complicated quickly so let’s begin with the basics. Taxes are monies collected by the Internal Revenue Service (IRS) to fund government activities. These activities include federal expenses like homeland security, social security, Medicare, and Medicaid. Depending on where you live, you’re likely to pay state and local taxes, too. At the state and local levels, your taxes pay for public services including public schools, police protection services, and state government, too.
State and local taxes are collected from a lot of sources including property taxes (usually from commercial and residential real estate), sales tax (goods and services), and your personal income tax. Similarly, the government, according to Tax Policy Center, “receives 48% of their revenue from individual income taxes, 9% from corporate taxes, and another 35% from payroll taxes.” Your individual income tax or personal income tax is the money taken from your paycheck for government-funded programs.
What is “withholding tax”?
On the Federal level, withholding tax is the act of your employer reserving money each paycheck to pay to the IRS in order to fund government programs. You (the employee) are also responsible for paying an amount that matches your employer. If you’re a freelancer or work for yourself, withholding taxes to pay the government will be your responsibility.
As described by The Balance, your W-2 form “is used by corporations and small businesses to report taxable income to workers.” Companies that report using a W-2 withhold federal and state taxes. Tax forms have quite a bit of details that are crucial to pay attention to. NerdWallet takes a deeper dive into how to read and understand this form.
As tax season approaches, you’ll want to make sure you understand how to read each form and make sure you can reflect on this information as it pertains to your specific case. Employers are required by the IRS to send your W-2 statement by January 31st so you have enough time to do your research or hire a tax preparer if you so choose. You’ll also want to comb through this document to make sure the information reflected on this document is true and accurate given your work for that employer.
Being prepared is a great way to empower yourself as you journey into the next year of your personal finances. Perhaps diving deeper into your W-2 and tax statements will allow you to make different decisions about your employer or how you handle your finances in the future? Whatever you decide, being the authority on your finances is key.
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