We are all required to pay taxes throughout any given year, whether with our every paycheck or in quarterly estimated payments.

In the US tax history, tax withholding is a relatively new concept, the system having been fully and permanently implemented only after the World War Two, and a few of today’s retiree may still remember a time without tax withholding.

Under today's tax withholding system, taxes are collected at the source, meaning that wage earners never see the money that they owe in taxes - it's taken by their employers out of their paychecks and transmitted directly to the federal government.

Independent contractors aren't subject to withholding, and neither is the income earned by investors, but individuals are responsible for calculating and remitting their own tax payments on a quarterly basis.

The general rule for everybody is that at least 90% of taxes owed is either withheld on each paycheck or paid in estimated taxes throughout the year.

Payroll withholdings include:

	Federal income tax;
	State income tax;
	Employee portion of Social Security tax;
	Employee portion of Medicare tax;
	Court-ordered withholdings;
	Other withholdings.

Federal income tax

Employers are required to withhold the federal income tax that an employee is expected to owe based on salaries or wages. The amount withheld for federal income tax is based on the employee's salary or wages as well as personal information that the employee is required to provide the employer on federal form W–4 (including marital status and the number of dependents claimed as exemptions). In cases where an employee is paid low wages and/or has a large number of personal exemptions, it may not be necessary for the employer to withhold any federal income tax.

Each year the IRS publishes tables of the federal income tax rates and 2013 is no exception. As mentioned in our previous newsletter, according to the recently passed legislation, in 2013, while the 10%, 15%, 25%, 28% tax rates remain permanently untouched, and the 33% and 35% income tax rates remain the same for taxable income under $400,000 (single), $425,000 (head of household), and $450,000 (married filing jointly), earnings above these amounts will be taxed at a rate of 39.6%.

State income tax

As mentioned above, the income state tax, for the 41 states that require it, works pretty much like the federal income tax; of course rates differ from state to state.

The FICA tax

Federal Insurance Contribution Act (FICA) taxes, which include contributions to federal Social Security and Medicare programs, must be paid by all American workers, whether they are employed by a company or are self-employed.

The FICA tax is withheld from an employee's salary or wages and the employer is also required to pay a FICA tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the FICA tax.

Social Security accounts for 6.2% of the FICA tax, while Medicare accounts for 1.45%. Employers are also required to match the 7.65% contributed by every employee, so that the total FICA contribution is 15.3%. Self-employed persons are required to pay both the employer and employee portions of the FICA tax.

The maximum amount of earnings subject to the Social Security tax (taxable maximum) increased from $110,100 to $113,700 as of January 2013.

Unlike Social Security, the amount of compensation subject to the 1.45% Medicare FICA tax is uncapped. For 2013, the Medicare tax rate rises to 2.35% (an extra 0.9%) for single taxpayers with annual income of more than $200,000 and for married joint filers whose combined annual income exceeds $250,000, under a provision of the Patient Protection and Affordable Care Act.

Court-ordered withholdings

Courts of law may order employers to withhold money from an employee's salary or wages for purposes such as paying child support or repaying debts.

Other withholdings are voluntary and include:

The IRS issued new guidance on withholding in 2013 specifying that employers should start using the new withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013, but not later than Feb. 15, 2013. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2013.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

However, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer.