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How do I determine the amount taken out of my paycheck for taxes?
This questions pertains specifically to Social Security. If I get paid 1000 a month, take out 200 (20%) untaxed to 401k with 800 left over, how much should my Social Security tax be? Do I multiply 800 x .062 (rate of social security right now)?
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Social security and Medicare taxes apply to your base pay before the deduction for the 401(k), so in this case your SS tax is $1000 x 6.2% = $62.00, and Medicare = $1000 x 1.45% = $14.50.
In case you're wondering why the 401(k) contribution is taxed for SS amd Medicare - it's because when you make withdrawals later on in retirement the proceeds are not taxed for SS and Medicare. So you pay now instead of later. Income tax is different - you avoid paying now on your 401(k) contribution but then you have to pay later when you make withdrawals. |
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