Understanding your take-home pay.
Our two cents
An employer is required to withhold and/or pay payroll taxes on an employee's behalf. These include state and federal income taxes, as well as Social Security and Medicare taxes. While your employer may handle many of the details, it's important for you to understand the common tax-related documents and forms so you'll know what you're paying and why.
Here are some of the IRS forms you should be familiar with:
Form W-4 –When you begin a new job, you'll be asked to complete a Form W-4. Filling out a W-4 helps the employer calculate the correct amount of federal income tax to withhold. To complete the W-4, you must determine the number of withholding allowances to claim, which in turn determines the amount of federal (and often state) taxes withheld from each paycheck. The IRS website offers a useful withholding calculator for determining the appropriate number of allowances.
Form W-2 –A W-2 reports an entire year's earned income (including all tips and bonuses). Tip income should be tallied daily, reported to employers monthly and included on an annual income tax return, where it's reported as wages. Employees usually receive at least three copies of the W-2: one for filing with the federal tax return, one for filing with the state tax return and one for filing away in their own records.
Form 1099 –A 1099 is an annual statement detailing earnings other than wages, salary and tips. You might receive a 1099 form if you receive interest, dividends or capital gains distributions. Forms are sent from those who paid the earnings, such as a bank, mutual fund company or brokerage firm.