WEBVTT BENTONVILLE.PTHERE ARE SLOWDOWNS IN BOTHPDIRECTIONS.PKELLY: IN TODAY'S ASK KELLY, GOTPA COMPLICATED QUESTION FROMPGEORGE FILMORE.PGEORGE WANTS TO KNOW WHATPPERCENTAGE OF TAXES HE SHOULDPHOLD OUT OF HIS PAYCHECK IF THEPPERSON HE'S WORKING FOR DOESN'TPDO IT FOR HIM.PGEORGE, WE CONSULTED WITHPMAULDIN/VAUGHT CERTIFIED PUBLICPACCOUNTANTS IN FAYETTEVILLE.PTHEY SAY IT DEPENDS ON A LOT OFPDIFFERENT FACTORS.PBUT AS A RULE OF THUMB, THEY SAYPIF YOU MAKE AROUND $50,000, YOUPSHOULD WITHHOLD ABOUT 10% FORPFEDERAL AND 5% FOR ARKANSASPINCOME TAX.PIF YOU'RE TREATED AS ANPINDEPENDENT CONTRACTOR, YOU HAVEPANOTHER TAX TO BUDGET FOR, THEPSELF-EMPLOYMENT TAX.PTHAT'S YOUR SOCIAL SECURITY ANDPMEDICARE TAXES WHICH EQUAL ABOUTP15PTHERE'S A LOT MORE TO THIS, THEPCPA FIRM I CONSULTED WITH DID APREALLY NICE JOB OF LAYING IT ALLPOUT.PSO I'M GOING TO PUT THATPINFORMATION FOR YOU, ON OURPWEBSITE, SO YOU CAN LEARN MORE,PAT 4029TV.COPIF THERE IS A QUESTION I CANPHELP YOU WITH, LET ME KNOW.PTWEET ME AT @4029KELLY.
Ask Kelly: What percentage of taxes should you withhold from your paycheck?
Ask Kelly: What percentage of taxes should you withhold from your paycheck if your employer doesn’t withhold for you? The following information comes courtesy of Michael Mauldin, CPA, CVA, Parter at Mauldin Vaught, PLLC in Fayetteville. Mauldin: “We have a ‘progressive tax system’ here in the States which simply means the more money you make, the more you pay in income taxes. It’s not as bad as some might think because there is a common misconception that if you make more money and you get bumped into a higher tax bracket, all your income is taxed at the higher rate. Thankfully, only the last money you make is taxed at the higher rate. For example, if someone makes $100,000, the first ~$10,000 may be tax-free, the next ~$10,000 may be taxed at 10%, the next $25,000 may be taxed at 15%, and the remaining ~$55,000 may be taxed at 25% (amounts are only examples, not actual). This person is in the 25% tax bracket, but they actually paid $18,500 in federal income tax for an ‘effective tax rate’ of 18.5%. Arkansas income taxes increase from 5% to 7%. All that to say, “it depends”. It depends on how much a person makes. We want to shoot for withholding at the 18.5% effective rate so a person won’t owe much money or have a large refund, but each person’s employer has to rely on the Form W-4 (Employee’s Withholding Allowance Certificate) he completed when he was hired. It’s incredibly easy to use the form’s worksheet and incorrectly claim too many personal allowances. The more allowances you claim, the less income taxes will be withheld from your paycheck…and greater the chance you’ll owe taxes at tax time. The employee can always complete a new W-4 with less personal allowances so more taxes will be withheld. As a rule of thumb from my experience, I normally like to see ~10% federal and 5% Arkansas income tax withholdings for those making ~$50,000. Common examples where we encourage clients to claim fewer personal allowances on the W-4 are… · If both spouses earn a nice wage, they may bump each other up into a combined higher tax bracket. · One spouse earns a nice wage and the other spouse earns a much smaller wage. Very few income taxes may be withheld from the spouse’s smaller wages, but when added to the other spouse’s higher wages, it’s taxed in a higher income tax bracket · A person works multiple part-time jobs. The income tax withholdings from any one job often isn’t enough to cover the taxes once all the income is combined. Another option is that a worker isn’t treated as an employee, but as an independent contractor which means the no taxes are being withheld from his earnings. If this is the case, there’s another tax they’ll need to budget for…the self-employment tax. The self-employment tax is Social Security and Medicare taxes which equal ~15%. A self-employed individual pays this 15% on their net earnings (gross income less reasonable and necessary business expenses) in addition to the income taxes mentioned earlier. It’s common for self-employed individuals to pay 30% to 45% of their net earnings in taxes once you consider federal and state income taxes plus the 15% self-employment tax. I’d encourage those folks to set aside 1/3 of their check for taxes…possibly more, the higher their net earnings. They’ll want to visit with a CPA regarding qualifying business expenses and quarterly estimated income tax payments. The IRS expects self-employed individuals to make tax payments throughout the year. There may penalties for underpaying taxes if you wait and write a large check at tax time.”
Ask Kelly: What percentage of taxes should you withhold from your paycheck if your employer doesn’t withhold for you?
The following information comes courtesy of Michael Mauldin, CPA, CVA, Parter at Mauldin Vaught, PLLC in Fayetteville.
Mauldin: “We have a ‘progressive tax system’ here in the States which simply means the more money you make, the more you pay in income taxes. It’s not as bad as some might think because there is a common misconception that if you make more money and you get bumped into a higher tax bracket, all your income is taxed at the higher rate. Thankfully, only the last money you make is taxed at the higher rate. For example, if someone makes $100,000, the first ~$10,000 may be tax-free, the next ~$10,000 may be taxed at 10%, the next $25,000 may be taxed at 15%, and the remaining ~$55,000 may be taxed at 25% (amounts are only examples, not actual). This person is in the 25% tax bracket, but they actually paid $18,500 in federal income tax for an ‘effective tax rate’ of 18.5%. Arkansas income taxes increase from 5% to 7%.
All that to say, “it depends”. It depends on how much a person makes. We want to shoot for withholding at the 18.5% effective rate so a person won’t owe much money or have a large refund, but each person’s employer has to rely on the Form W-4 (Employee’s Withholding Allowance Certificate) he completed when he was hired. It’s incredibly easy to use the form’s worksheet and incorrectly claim too many personal allowances. The more allowances you claim, the less income taxes will be withheld from your paycheck…and greater the chance you’ll owe taxes at tax time. The employee can always complete a new W-4 with less personal allowances so more taxes will be withheld.
As a rule of thumb from my experience, I normally like to see ~10% federal and 5% Arkansas income tax withholdings for those making ~$50,000.
Common examples where we encourage clients to claim fewer personal allowances on the W-4 are…
· If both spouses earn a nice wage, they may bump each other up into a combined higher tax bracket.
· One spouse earns a nice wage and the other spouse earns a much smaller wage. Very few income taxes may be withheld from the spouse’s smaller wages, but when added to the other spouse’s higher wages, it’s taxed in a higher income tax bracket
· A person works multiple part-time jobs. The income tax withholdings from any one job often isn’t enough to cover the taxes once all the income is combined.
Another option is that a worker isn’t treated as an employee, but as an independent contractor which means the no taxes are being withheld from his earnings. If this is the case, there’s another tax they’ll need to budget for…the self-employment tax. The self-employment tax is Social Security and Medicare taxes which equal ~15%. A self-employed individual pays this 15% on their net earnings (gross income less reasonable and necessary business expenses) in addition to the income taxes mentioned earlier. It’s common for self-employed individuals to pay 30% to 45% of their net earnings in taxes once you consider federal and state income taxes plus the 15% self-employment tax. I’d encourage those folks to set aside 1/3 of their check for taxes…possibly more, the higher their net earnings. They’ll want to visit with a CPA regarding qualifying business expenses and quarterly estimated income tax payments. The IRS expects self-employed individuals to make tax payments throughout the year. There may penalties for underpaying taxes if you wait and write a large check at tax time.”