Tools and resources to help make sense of payroll

The first income tax in the United States was created in 1861 during the Civil War as a way to fund the war. After the war, the tax became unpopular and was not renewed. It wasn't until 1913 that the Sixteenth Amendment of the Constitution was ratified and gave Congress the ability to collect taxes on income. During World War II, payroll withholding and quarterly tax payments were introduced for the first time, which still exists in our modern income tax withholding system.

Federal individual income tax is the tax collected from individuals by the Internal Revenue Service (IRS) on taxable income. The revenue collected through income tax funds federal programs such as Social Security and Medicare. The federal individual income tax is a progressive tax, meaning that the higher the income is, the higher the tax rate will be. For many Americans, payroll taxes are deducted directly from their paychecks.

The federal income tax has seven tax rates that go up as your income does. In this way, the U.S. tax system is progressive. The more taxable income you have, the higher federal income tax rate you are subject to. The less taxable income you have, the lower the federal income tax rates you are subject to. These rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%.

Taxpayers are not charged a single rate on all of their taxable income. Rather, the government divides your taxable income into brackets, and taxes each bracket of income at its appropriate rate.

FICA stands for the Federal Insurance Contributions Act and is a federal tax that is withheld from every person's paycheck. FICA constitutes of two taxes: Social Security tax and Medicare tax. FICA taxes are only withheld at the federal level.

Each tax rate will vary depending on if you're an employer, an employee, or self-employed.

FUTA is a tax that only employers pay. It covers unemployment compensation to workers who have lost their jobs.

• Employers pay 6.0%, less a credit for contributions to state unemployment insurance funds, up to 5.4% on $7,000
• If you are entitled to the maximum 5.4% credit, the FUTA tax rate after the credit is 0.6%
• Certain states have lost part or all of this credit. Employers in those states need to check with their labor department to determine the current allowed credit for the state in question

The Federal minimum wage is the minimum hourly rate that a non-exempt employee can be paid. The National minimum wage was enacted in 1938 under the Fair Labor Standards Act (FLSA) and was set at $0.25 per hour. Since 1938, Congress has raised the Federal minimum wage twenty-two times. In addition to the Federal minimum wage, state and local jurisdictions can set minimum wage rates. When federal and local minimum wage rates apply employers are required to pay the higher rate.

• Federal Minimum Wage: $7.25 per hour effective July 24, 2009

There are several federal withholding forms. The most commonly used federal withholding form is the Form W-4 and tells your employer how much money to withhold from your paycheck for federal income tax. Completing your W-4 accurately helps avoid too much or too little tax being withheld from your paycheck. There is also a federal withholding form for exempt individuals.

W-4

— Employee's Withholding Certificate
Type: Resident

W-4(SP)

— Certificado de Retenciones del Empleado
Type: Resident

673

— Statement For Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911
Type: Exempt

8233

— Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual
Type: Exempt