If you are self-employed, taxable income is your adjusted gross income minus personal exemptions and deductions. If you are an employee, taxable income is your pay after pretax deductions and personal allowances. If you have no qualifying deductions, all of your gross income is taxable. In this case, the percentage of tax you must pay varies by tax type.
Federal Income Tax
As an employee, the percentage of your gross income that is subject to federal income tax depends on your total gross income, the allowances and filing status you put on your W-4 form, and the IRS Circular E’s percentage tables. As of the time of publication, depending on your filing status, pay period and wages after subtracting allowances, your federal income tax percentage may be 10, 15, 25, 28, 33 or 35 percent of your wages. If you are self-employed, your tax bracket depends on your filing status and taxable income. For example, as of the time of publication, if you are a married person filing a joint return and if your taxable income does not exceed $17,000, you pay 10 percent of your taxable income.
State Income Tax
State income tax laws vary. In many cases, if you are an employee, the state requires your employer to use a system that is similar to federal income tax withholding, except that he uses the state tax-withholding tables to figure out your withholding. In other cases, a flat percentage may apply. For example, the Pennsylvania Department of Revenue requires employers in the state to withhold employee state income tax at a flat 3.07 percent of gross compensation. Georgia income tax laws allow taxpayers to claim a standard deduction or itemize their deductions and pay a flat percentage, which is based on their taxable income.
As of 2011, if you are an employee, you pay 4.2 percent of your gross income, up to $106,800 for the year in Social Security tax, and 1.45 percent of all of your gross income in Medicare tax. Your employer pays 6.2 percent and 1.45 percent, respectively. If you are self-employed, you pay the full amount of 10.4 percent in Social Security tax and 2.9 percent in Medicare tax. The annual Social Security wage limit of $106,800 applies to all taxpayers.
State or local laws might require you to pay additional taxes. For example, as of the time of publication, California employers must withhold state disability insurance from employees’ paychecks at 1.2 percent of taxable wages, up to $93,316 for the year. Contact your state revenue agency to know which taxes apply to you.
- Daily Finance; How to Calculate Your Taxable Income; Kelly Phillips Erb; January 2010
- IRS.gov: Administrative, Procedural, and Miscellaneous
- IRS.gov: Circular E
- Tax-Rates.org: Georgia State Income Tax Rate (2011)
- California Employment Development Department: Rates, Withholding Schedules, and Meals and Lodging Values