Episode•August 22, 2019•7 min

Listener Request: What is Income Tax and How Does it Work? | Ep. 6

Do you know why taxes are coming out of your check every pay period? How do they calculate it? What is it used for? Join Tiffany as she answers these questions and more! This episode was a listener request! To submit a question: join our Facebook group or fill out the form on the website and it could be featured on a future episode! Be sure to subscribe and rate this podcast on your favorite platform! This helps more people find us. Links Visit our blog: www.moneytalkwitht.com Connect on Social Media Facebook: Money Talk With Tiff Twitter: @moneytalkwitht Instagram: @moneytalkwitht LinkedIn: Tiffany Grant YouTube: Money Talk With Tiff Channel Pinterest: Money Talk With Tiff This podcast uses the following third-party services for analysis: Podcorn - https://podcorn.com/privacy OP3 - https://op3.dev/privacy

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Key Takeaways

1
W-4 exemptions directly control withholding amounts
More exemptions = less tax taken from each paycheck
Use the worksheet on the form to calculate the right number instead of defaulting to 0 or 1
You can update your W-4 at any time during the year when life changes occur
2
Large tax refunds are not free money
A big refund means you overpaid taxes throughout the year
The government holds your money interest-free until you file
Ideal scenario is to withhold the correct amount so you neither owe nor receive a large refund
3
Employers must match employee tax withholdings
If $200 is withheld from your check, the employer sends $400 total to the government
This matching requirement applies to federal income taxes
4
Income taxes fund major government programs
Taxes pay for Social Security, Medicaid, Medicare, and food stamps
Worker shortages threaten the sustainability of these programs

Intro

Listener-requested episode explaining how income taxes are calculated and withheld from paychecks.
Tiffany Grant, host of Money Talk with Tiff and former HR professional with payroll experience.

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– Why This Episode Exists

Listener asked how taxes are calculated and taken from each paycheck.

– Tiffany's Payroll Background

Tiffany previously worked in payroll and handled both employee and employer tax payments.

– How W-4 Exemptions Work

The number of exemptions claimed on your W-4 determines how much tax is withheld from each paycheck.

The more exemptions you put on the W-4 form, the less taxes that will be taken out.

Tiffany recommends using the worksheet on the form rather than defaulting to zero or one.

– The Cost of Getting a Big Refund

Over-withholding gives the government an interest-free loan until you file your taxes.

When you get a big tax refund, it's because you pay too much in income taxes.

– Employer Matching Requirement

Employers must match the amount withheld from your paycheck dollar-for-dollar when sending taxes to the government.

They're sending $400 just for you, just for that paycheck to the federal government.

– Where Income Taxes Go

Taxes fund Social Security, Medicaid, Medicare, and food stamps.

Worker shortages threaten the long-term funding of these programs.

– When and How to Update Your W-4

You can change your exemptions at any time. Life events like marriage or having children should trigger an update.

Make sure you change your W-4 exemptions if applicable, because it can make a huge difference in your paychecks.

Resources

W-4 Form and Worksheettool
Money Talk With Tiff Blogarticle

Topics

income taxpayrollW-4 form tax withholdingtax refundsgovernment benefitsSocial Securitypersonal finance