If you draw a regular salary or earn hourly wages, you're probably familiar with the concept of tax withholding. When you receive your pay stub each week, you probably glance at the various numbers and columns that adorn it. Look more closely at your most recent stub. You'll notice that there's a column for "gross income" or something to that effect. The number in this column represents the total value of the hours that you worked during the pay period.
Next to this column, you'll see a succession of other columns with labels like "Medicare" and "SS." Beneath these labels, you'll notice that there are smaller numbers. These numbers denote the amounts that have been deducted from your paycheck to cover the cost of certain federal taxes. Further to the right, you may notice a column that boasts a somewhat larger number. This number represents the amount that has been deducted from your paycheck to cover the cost of your federal income taxes. Depending upon where you live, you may notice an additional number that represents your state income tax liability.
Collectively, these figures comprise "withholding taxes." Virtually every American worker is required to make these payments. The country's employers are responsible for drawing up the calculations that determine the value of each worker's weekly withholding taxes. They're also responsible for collecting these funds and forwarding them to the IRS. As you probably know, the IRS processes tax payments using the tax returns that individual workers file.
Most salaried or wage-earning workers who file tax returns are eligible to earn tax refunds from the IRS. This is because employers often withhold too much income from their employees. What's more, workers are often able to claim a raft of tax credits and deductions on their tax returns. Collectively, these incentives lower the tax burden of the average worker and increase the likelihood that he or she will be eligible to receive a significant tax refund.
If you're unhappy to find that nearly one-third of your total earnings have been withheld from your paycheck, you can blame these withholding calculations. Despite the fact that you'll be eligible for certain credits and deductions, your taxes are withheld on the basis of your income. If you earn a relatively healthy salary, you'll be subject to higher rates of withholding. If you earn a modest living, your burden will be smaller. The rates at which your taxes are withheld are known as "marginal rates."