US taxpayers must pay income tax through withholding or estimated tax. Employers withhold a percentage of paychecks based on exemptions claimed on Form W-4. Taxpayers can claim exemptions for themselves, spouses, and dependents, which reduce taxable income. Withholding exemptions are not the same as deductions, which are subtracted from taxable income. At the end of the year, taxpayers receive a Form W-2 and reconcile figures to determine if they owe taxes or are owed a refund.
Most governments around the world require citizens to pay income taxes in one form or another. Within the United States, taxpayers must pay income tax either through income tax withholding or by paying estimated tax. For those who use the tax withholding system, the employer withholds a certain percentage of money from each paycheck and transmits the funds to the Internal Revenue Service (IRS) on behalf of the taxpayer. The amount the employer withholds depends on the amount the employee used for their exemption from withholding on their IRS Form W-4.
In the United States, taxpayers whose income is below a certain threshold, which is subject to change each year, are entitled to at least one exemption from withholding tax. The tax withholding exemption is a dollar amount that is exempt from tax. In addition to the exemption from withholding that a taxpayer may claim for himself, a taxpayer may also be entitled to claim an exemption from withholding for his spouse, as well as any qualifying dependents.
An exemption is an amount that is deducted “from above,” so to speak. A taxpayer calculates his own gross income and can then deduct the appropriate amount for each exemption to which he is entitled, leaving the adjusted gross income for the tax year. Exemptions should not be confused with deductions. A deduction is an amount that is subtracted after calculating taxable income. In the United States, a taxpayer can choose to use the standard deduction amount, or can itemize deductions, after calculating adjusted gross income.
For most workers, the withholding system is used to pay taxes throughout the year. Estimated taxes are generally only paid by independent individuals or businesses. An employer is required to have a new employee complete IRS Form W-4 when he is hired. IRS Form W-4 tells the employer how many tax exemptions withholding the employee is claiming for the year. Based on the number of exemptions claimed and the amount of the employee’s pay, the employer determines how much must be withheld and sent to the IRS each pay period.
At the end of the year, each taxpayer will receive a Form W-2 from the IRS, which shows how much they earned and how much the employer withheld on their behalf. The employee will then complete his tax return and reconcile the figures to see if he still owes taxes or owes a refund. When the proper withholding tax exemption figure is used, an employee should not owe tax at the end of the year.
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