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Power of the Paycheck

01

Paycheck Overview

02

Helpful Terms & Tools

03

Exemptions

04

Deductions

How Your Exemptions Work

  • The more exemptions you claim, the less money you will have withheld in federal income tax each pay period. More exemptions = more paycheck.
  • Completing the W-4 form (W stands for wages) states to your employer how much Federal tax to withhold.
  • If your state has an income tax, you may need to complete a separate withholding form for your state.
  • Your employer uses the information you provide on these forms to calculate the amount of tax they will withhold form your income.
  • Be careful with exemptions. Claiming too many could mean not enough income tax is withheld from your and could result in a tax bill at the end of the year.
  • After completing the W-4 document, the payroll department will reference the Circular E (link) and determine how much money should be withheld each pay period based on your filing status, your income and the number of exemptions you selected.
  • At the end of the year a W-2 is created for each employee and shows the total dollar amount of money withheld and sent to the government.
  • The amount of Federal Withholding on the W-2 is included on your tax documents.

More exemptions = more paycheck.

What should you consider when determining the number of Exemptions?

The number of exemptions one selects can be based on several variables including amount of income into the household, tax bracket, investments, household debt and so on, so it can be different for everyone. Following are two simple examples to explain the concept.

Example 1

Maggie, a single person, lives on her own. She selected 1 exemption on her W-4. Her employee uses the Circular E and determine how much money should be withheld from Maggie’s paycheck based on single status, 1 exemption, her gross income. At the end of the year Maggie will be given a W-2 and the amount shown in the Federal Withholding box on this document will show the amount of Federal Taxes withheld from Maggie’s paycheck and paid to the government on her behalf. NOTE: Maggie may or may not have to pay more taxes or get a refund based on any other investments, interests, and other income she may have – but she has contributed toward her tax commitment in alignment with her status of being single.

Example 2

Bonnie is a retail Department Manager and her husband Brad is Fireman. They have two children. Bonnie and Brad could typically take up to 4 deductions for their family of four. Bonnie could claim 2 deductions and Brad could claim 2 deductions, or any one of them could all four. This would mean that based on their withholding selections their employer would use the Circular E to determine how much money should be withheld from their paychecks based on the number of exemptions they selected. At the end of the year, Bonnie and Brad will get a W-2 tax document from their employer stating the amount of Federal Taxes withheld from their paycheck and paid to the government. Bonne and Brad may or may not have to pay more taxes or get a refund based on any other investments, interests, and other income they may have – but they have contributed toward their tax commitment in alignment with their status of family of four.

The Process

understanding your w-4

W-4 document completed by employee

Employer referencing the Circular E to determine dollar amount to withhold

understanding your w-2

Employer referencing the Circular E to determine dollar amount to withhold

Year-end tax document showing where the Federal Withholding amount is put on the tax form

Did You Know

You can avoid paying taxes on a portion of your paycheck by having your employer make pre-tax deductions. Check with your employer on what might be eligible.

This Guide

01

Power of the Paycheck Part 1 - Paycheck Overview

02

Power of the Paycheck Part 2 - Helpful Terms & Tools

03

Power of the Paycheck Part 3 - Exemptions

04

Power of the Paycheck Part 4 - Deductions

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