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Current time:0:00Total duration:14:29

Impact of W-4 allowances on paycheck

Video transcript

now let's dig a little bit deeper and explore how your paycheck is actually affected in terms of the numbers depending on how many allowances you pick and for the sake of this video I will stick with the single individual making $40,000 a year obviously circumstances would be different you'd have a different number of allowances if you if you have someone who's married filing jointly or they may have more dependents than what we're talking about in this video and what we're gonna look at is what is going to what will the paycheck look like and what will the withholdings look like if the person elects to have one allowance so they only put this one right over here in line a or if they want to have two allowances because they could put a one right over here because they are single and they have only one job where we're assuming they have only one job so let's go into the numbers a little bit so we're assuming we're assuming that we start off with at least from this employer gross income that the employer knows about so the income is $40,000 forty forty thousand forty thousand dollars and actually let me do two cases here so this right over here would be the case of one allowance one allowance and over here the case I'm gonna have two allowances two allowances so once again the two allowances won't change what the actual gross income is so it's $40,000 and regardless of how many allowances are filled out on the w-4 form you're gonna pay the same amount in Medicare Social Security tax so let me fill that out so Medicare Medicare which is going to be one point four five percent of this income so it's one point four five percent is going to be let me get my calculator out so let's see forty thousand times one point four five percent is the same thing as zero point zero one four five it is going to be five hundred and eighty dollars so I'm going to pay five hundred and eighty let me align the Z the so minus five hundred and eighty dollars I'm gonna do that in either case that's not dependent on that's not dependent on the allowances and now let's calculate Social Security so social social security tax this is going to be 6.2 percent and these are all the rates at the time of making this video if you see this if you watch this video in a different year I encourage you to look up the rates that are relevant in that year so 6.2 percent once again you're gonna pay on the $40,000 get the calculator out again so forty thousand times 0.06 - that's the same thing as 6.2 percent that gets us to two thousand four hundred and eighty dollars so - two thousand four hundred and eighty dollars - two thousand four hundred and eighty dollars and now let's calculate what the federal income tax is and so in order to figure out federal income tax so this is so so far these are things that you're paying regardless of what the allowances are but now let's the allowances are going to start to factor in when you think about your federal income tax so let's look up let's do taxable income taxable actually let's do it this way so we're gonna start with our gross income now this person is going to get the standard deduction and for a single person in the year that I'm making this video the standard deduction is $6,200 so let me write it over here let me do it a new color so standard deduction standard deduction and the things I'm we're going to list now the standard deductions and the amount you get for your allowances these are things that are going to lower your taxable income so your standard deduction is $6,200 that's true of regardless of how many allowances you pick and then allowances this is going to be the key difference allowances allowances and so you're going to lower your income at least in the year that I'm making this video by three thousand nine hundred and fifty dollars per allowance per allowance so if you have one allowance you're going to reduce your income by three thousand nine hundred and fifty dollars if you have two allowances it's going to be two times that so it's two times 3950 so let's see that's two times four thousand to be eight thousand and it's gonna be hundred less than that so it's going to be seven thousand nine hundred dollars did I do that right yeah that's seven thousand nine hundred dollars excuse me I had something in my throat so let's see seven thousand seven thousand nine still feels like it's my t'roat throat but I will power I will power on so once again these are your allowances and so now based on this then once again this is all your employer's this isn't us doing our taxes this is our employer estimating how much taxes we'll have to pay but your employer doesn't know about other things going on in your life donations that you might be making to charity or income that you might be getting from other sources from investments or whatever else this is just what the employer knows based on how much it's paying you and and what you filled out in the w-4 form and so based on the gross income up here and the standard deduction and the allowances we can then come up with your employer's estimate of your taxable income so taxable income taxable income in this situation and if you only have one allowance it's going to be your gross income $40,000 minus the standard deduction $6,200 - three thousand nine hundred and fifty three thousand nine hundred fifty gets us to twenty nine thousand eight hundred and fifty twenty-nine thousand eight hundred fifty now if you have two allowances it's going to be well you could say we're gonna subtract another three thousand nine hundred fifty you take forty thousand minus sixty two hundred minus seven thousand nine hundred well that's just let me just do that so it's 40 thousand one two three - the standard deduction once again we're adjusting our gross income to taxable income minus two times this so 7904 two allowances now if you had three or four or five allowances then you would be subtracting that multiple of three thousand nine hundred fifty here it's good a twenty-five thousand nine hundred twenty-five thousand 25900 and so now we can figure out how much tax this person is going to pay and we've already done videos and encourage you to watch those videos on the progressive tax system where the first X dollars you pay a lower rate and then on each and then you have incremental brackets and for those incremental dollars you pay higher in higher rates and at the time of making this video the first $10,000 you're going to pay 10% so this tax is let me just write the taxes right over here so taxes taxes and I'm only to calculate federal income taxes state income taxes vary but your employer also typically with holes for state income taxes as well but your taxes are your federal let me write this the federal tax is it's going to be 10% 10% on the first first on on first on the first 9000 $75 and then it's going to be 15% on the amounts to this the bracket goes into 36,000 and and some change but we're below that obviously and so it's gonna be 10,000 on the on the first and then 15% up to up up to the figures given here up to the figures given here because they are in the fifteen percent tax bracket that bracket as I said it's actually let me look it up I'm gonna pause the video I'll look it up for so just looked it up it's right now is fifteen percent up to up to thirty six thousand nine hundred so let me write that thirty six thousand nine hundred and clearly these are within that range so based on that let's actually calculate what the federal taxes are going to be for each of these scenarios so the first so you're gonna pay in the first scenario with one allowance you're gonna pay 10% so 0.1 times the first 9075 that's actually pretty easy to calculate it's gonna be nine hundred seven dollars and fifty cents but I'll just write that times 907 five and then you're going to pay 15 percent 0.1 point five on the next increment times times this amount 29 850 - 907 five 907 five remember it's only on the incremental amount - 907 five it gets us to four thousand twenty three point seven five four thousand twenty twenty three twenty three point seven five so that's that the federal or the estimated federal taxes that your employer is estimating in this scenario and in this scenario it's going to be get it back and essentially I can do the same exact let me just do that same thing that just typed in but instead of the twenty nine thousand eight fifty it's now twenty-five thousand twenty-five thousand nine hundred because it's lower now because I now have two allowances instead of one and it is going to be it gets us to three thousand four hundred thirty one thirty four thirty one twenty five thirty four thirty one twenty five so now we can estimate what the or this is going to be your employers or the person's employers estimate of what they get so net net to employee and I should say estimate estimate of net or this is actually what's going to be paid to net to the employee but it's a based on an estimate of likely taxes net to employee em net to employee is going to be so let's get our just get out all of our information out here it's going to be it's gonna be the forty thousand dollars that's your gross income forty thousand dollars and I'm doing the case first with one allowance a - the five hundred eighty dollars in Medicare taxes - the two thousand four hundred eighty in Social Security taxes and this is what you're gonna pay regardless of how many allowances so let me start with that so thirty-six thousand nine forty so that's after paying Medicare and Social Security taxes and then if you have one allowance you're going to have the federal income tax there's a four thousand twenty three point seven five so that's - four thousand twenty three point seven five gets us gets us thirty two thousand nine hundred and sixteen point twenty five so let me write that down that is that is thirty two thirty two thousand nine hundred and sixteen point twenty five so once again this is your employer's estimate of what you should be getting after you pay your taxes once again your employer does not know about other sources of income investments that you might have or donations to charity or whatever else and so on a or on a bi-weekly basis if they pay you every two weeks there are 52 weeks in a year they'll pay you twenty six times a year they'll pay you one twenty sixth of this and will actually calculate that in a second but before we do that let's not you calculate the second the situation where you have two allowances we already saw that after paying for Medicare and Social Security at thirty six nine forty so let's do that again thirty six nine forty and then now subtract your lower let's subtract your lower taxes and it because you had two allowances so you had lower or estimated lower lower taxable income so 3431 0.25 0.25 thirty three 508 point seven five so this is this is this is thirty three 508 0.75 and so on a per paycheck basis and remember the whole point of this is to see how your allowances affect your actual paycheck affect your actual paycheck let's get the calculator back so the second one if we divide by 26 so assume you have 26 pay periods in the year each paycheck you can get twelve eighty eight an eighty cents so twelve eighty eight twelve eighty eight and eighty cents and eighty cents so that's going to be your biweekly paycheck well in this set so let me write this paycheck pay cheque so we're assuming every other week so 26 per 26 per year and in the one allowance circumstance it's going to be it's going to be thirty two nine one six point two five / 26 / 26 guess it's 12 66 and let me round up a penny so twelve twelve sixty six oh one did I do that right twelve sixty six oh one if we were to round so roughly speaking roughly speaking that extra allowance for this individual right over here has resulted when they put the extra allowance they get a little bit they get a little bit over twenty dollars more per paycheck with which amounts to a little more than forty dollars per month and of course it's not just free money if at end of the year it turns out that they if at the end of the year if they ended up paying this much in taxes but it turns out that they actually should have paid this much in taxes then come the before the tax deadline they're going to have to pay the IRS the difference now on the other hand if they pay this much if this much is withhold but they didn't have to pay that much they're going to get a refund and really that's up to that person to decide how conservative or aggressive they want to be on that I guess on that issue
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