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Understand How to Calculate Salary after Taxes are Deducted

written by: Faith Oh•edited by: John Garger•updated: 1/17/2011

How much one takes home after taxes is always a concern for most people. This article explores how to calculate salary after taxes, figuring out your gross annual income and taxable income, your tax brackets and adjusting your tax withholding.

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    Overview

    Determining your tax bracket helps you when filing your taxes 

    Your take-home salary in each pay check you receive is what is left over after taxes and other deductions have been taken out. What this amounts to depends on your tax and income bracket and how much is deducted by your employer for retirement savings, health insurance, and any other deductions. Understanding these deductions help you know not only how to estimate and calculate salary after taxes, but how to figure out your taxable income at the end of the year.

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    Taxes and W-2s

    All income earners are expected to pay taxes based on their incomes as determined by the IRS. How much you owe in taxes depends on your taxable income, which is calculated after all itemized or standard deductions are taken out when you file your taxes. Some of these deductions include various tax credits such as for your children or dependents, for real estate taxes, mortgage interest payments, student loan interest payments, or for energy-efficient changes you made to your property.
    Once these deductions are taken out, whatever is left is your taxable income. To begin preparing your income tax return, you need a report of earnings from all jobs you held during the previous year. This is usually reported on a W-2, which employers are required to provide to you so you can file your taxes on time.
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    Tax Brackets and W-4

    During the year, employers are required to estimate how much you owe in taxes and deduct the estimated amount from each paycheck. This amount is sent to the IRS. You receive a tax return if more has been deducted than you owe in taxes. The amount deducted from your paycheck depends on your tax bracket. IRS rules dictate that in calculating withholding taxes, employers use either a percentage or wage-bracket (or income-bracket) method.

    Each individual's calculation of take-home salary after withholding taxes is different. IRS publication 15 provides appropriate guidance. For example, a single person who earns a semi-monthly income of at least $1000 and no more than $1020 with 1 withholding allowance will have $98 withheld in taxes. If the person, however, contributes 10% toward a 401(k) or similar retirement account, this reduces his taxable income to between $900 and $918 and the withholding tax is $83. This is because retirement contributions are made pretax.

    It is much easier and much more accurate to use the IRS withholding calculator to calculate salary after taxes. If after estimating your withholding tax you think more money is being withheld from your taxes than should be or if you received too much money as a refund in the previous year, then you can change your withholding allowances. Do this by filling out a new W-4 in your human resources office and either increase your number of withholding allowances or exemption claims. You are better off having your money now and putting it to good use rather than waiting a year to receive a tax return.

    Image Credit: Taxman123.com