Your paystub uses a lot of abbreviations. Some of them you might not know the meaning of. One of them is FWT, which means Federal Withholding Tax. Understanding FWT and other abbreviations on your paycheck can help you to understand how your money and taxes are working.
In this blog post, we’re going to discuss what FWT really means, how it is calculated, and why it is important for you to know correctly. Let’s dive in!
What Does FWT Mean?
Federal Withholding tax (FWT) is basically the portion of your income that your employer deducts and pays to the government. The exact amount of FWT you pay depends on your income and the details you fill in the W-4 form at the start of your job.
There are other abbreviations for Federal Withholding Tax, like FED tax, FT(federal tax), FITW( Federal Income Tax Withholding), or SITW (State Income Tax Withholding). There are also some other types of taxes you pay, like social security tax and medicare tax.
The government uses your FWT to run essential state services like maintaining infrastructure, paying government employees, and running state bodies. At the end of the year, you file all your taxes, and you need to adjust if the total sum of the returned tax is greater or less than the calculated income.
You might be asking yourself: “Why can’t the Government just charge it once a year?” The US Federal Withholding Tax works on a pay-as-you-go basis, meaning that instead of surprising you with a big FWT check at the end of the year, the government spreads this responsibility over the years, so it’s easier for you to pay.
This system also works best for the government as it gets a steady income each month. This method of tax deductions keeps record-keeping clean and easy as well.
Why Understanding FWT(And Checking it) Is Important?
It’s important for you to understand and periodically check your FWT. It allows you to be more aware of your income and maintain good financial hygiene.
Why FWT Is Important for Employees?
At the end of each tax year, your employee calculates the sum of your FWT and files a W-2 form, also called a Tax and Wage Statement. In simple words, they send a report to the IRS declaring how much FWT they deducted. IRS then matches it against your tax liability and the tax you filed (via Form 1040) and then reconciles it. If you have paid more tax than you were liable to, you get a tax refund. If the tax deduction was less than you were supposed to pay, you have to pay it.
Regularly checking your FWT and maybe calculating it with Paystubscity helps you track whether you’re paying the right amount. It can help you keep a record yourself, so it’s easier for you when you’re filing your taxes at the end of the year.
Calculating your own FWT is also important in detecting it early on if you’re being charged more than you’re liable to. This can be due to reasons like outdated information on your W-2 forms, tax-exempted income not being taken into account, or in extreme cases, your employer attempting fraud.
Being aware of your tax deductions helps you avoid these problems.
Why is FWT Important for Employers?
If you’re an employer, it’s legally mandated for you to do FWT deductions for your employees at each pay cycle. Slacking off in tax deductions can lead to uncomfortable fines and criminal charges.
Therefore, it’s important for employers to maintain a clean tax record.
Factors That Affect FWT Deductions
The amount of FWT deducted from your income depends on the details you entered when you filled out the W-4 form. The US has a progressive or graduated tax rate, which means the more you earn, the higher your tax percentage.
If your earning status changes, like an increase or decrease in income or any other major life change, your liable FWT changes. These changes include the following:
- ➡ Getting married or divorced
- ➡ Having or adopting a child
- ➡ Changing the number of dependents in your house
- ➡ You or your spouse starting or stopping a second job
- ➡ Taking out student loans, interest payments, IRA contributions
- ➡ Receiving income not subject to withholding like dividends, capital gains or self employment income
- ➡ Buying a home or other property
- ➡ Claiming tax credits that let you pay less tax like child tax credit.
- ➡ Contributing to pre-tax payments like health savings accounts and 401 (k).
In such cases, it’s worth refilling your W2 form with updated information so you don’t have to deal with discrepancies later on.
How to Calculate Your Own Federal Withholding Tax?
Calculating Federal Withholding Tax is an important step in payroll management. If you’re an employer, you need to do it regularly for your business. If you’re an employee, you can calculate your FWT to double-check it or just maintain a record.
The process starts with calculating your taxable income by deducting all the non-taxable amount from your gross salary. There are two methods usually used to calculate FWT:
- Wage Bracket Method: This is a simple method that uses IRS’s predecided criteria of FWT deduction based on employees’ salary brackets. Employers can simply deduct a fixed amount of tax based on each employee’s salary range.
- Percentage Method: This method is for employees with high wages. It’s a bit complex and involves subtracting standard allowances and applying tax brackets and percentages to remaining wage.
The percentage method is used by many automatic FWT calculators. You can also use the official IRS FWT estimator tool to get an idea of your liable tax. To read official documentation about FWT calculation, head on to IRS Publication 15-T.
Let Paystubcity Calculate Your FWT
If you’re a small business owner who’s not ready for extensive payroll management software and needs a neat, easy, and efficient way of generating pay stubs, Paystubscity is for you. It’s not some outdated calculator, it’s updated in real time and performs accurate tax deductions.
This pay stub generator also highly customizable, so you can add your branding and make it unique to your company. It’s not just for business owners, employees and other individuals like freelancers and tenants can use Paysubscity to create their own pay stubs and calculate their taxes effortlessly!
