Payroll Taxes

• The amount of payroll taxes for Social Security and Medicare may seem less because your employer is now withholding according to an extension of the "payroll tax holiday," originally passed as part of an economic stimulus package in 2008. This law reduced the employee's Social Security contribution from 6.2 percent to 4.2 percent of wages; the employer's percentage remained the same, as did everyone's contribution to Medicare. If your paycheck amounts to $1,000, this means a savings of $20 in each pay period.
  
  

Income Tax Withholding

• Your income tax withholding is set by the number of allowances you claimed on your W-4. Each allowance shelters a certain amount of your wages from tax withholding. There are different tax rates for married and single people, and exemptions you claim on your tax return for children and other dependents. If not enough tax is being withheld, you will owe the IRS money when you file your tax return.
  
  

Adjusting Withholding

• You can change the withholding amount by requesting another W-4 form from your employer. You can also download and print out this form from the IRS website. The form helps you calculate the number of allowances you should be claiming. The maximum number of allowances is 10; the more allowances, the less tax will be withheld. If you have too little tax withheld, you need to decrease your allowances. You can claim zero allowances; you can also request that your employer withhold any additional amount that you specify.
  
  

Withholding and Refunds

• Be careful not to adjust your withholding so that your employer takes excessive income taxes out of your paycheck. If this happens, you are in effect loaning money to the Internal Revenue Service that will be refunded to you, without interest, after you file your tax return. It would be wiser to invest the money directly from your paycheck into a savings account or Individual Retirement Account, where the money remains in your possession and can earn a good investment return.
  
  

Penalties for Underpayment

• If you do not have enough tax withheld, or don't pay sufficient estimated taxes, the IRS can levy a penalty. The bill will arrive a few months after you file your return, and accrue interest. The agency will not assess this penalty if the underpayment is less than $1,000; if you paid at least 90 percent of the taxes you owe; if you turned 62 or became disabled -- and had reasonable cause -- in the current or previous tax year, or if a natural disaster or other occurrence that interfered with your payments.