Why are US taxes taken out as if spread over the year instead of as due?

Question

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Given the following tax rates:

1..12000        10%
12001..24000    15%
24001..36000    20%
36000 and up    25%

Why are payroll taxes taken out as if the amount you were paid that period is how much you will be paid every period through the end of the year?

For example:

Bob makes $24,000 per year, at the end of the year he would owe the government $3000 at the end of the yes (10% * $11,999 + 15% * $11,999 + 20% * $1).

If he is paid monthly, then his employer will deduct $250 per month in taxes.

However, if he quits at the end of his 6th month, he should have only paid $1200, but his employer has deducted $1500 (half the $3000). So Bob is now entitled to $300 to be returned because his employer overdeducted.

Now take a slightly more complicated version:

Tom works two jobs, each of which pay $24,000 per year. He works the full year, and has made $48,000 when he's all done (gross). Tom should have paid $8400 in taxes, but if his employers deduct as described above, he has underpaid his taxes by $2400 (each employer withheld $3000, but that's not enough).

The two-part question:

A) Why are taxes taken out on a pro-rated basis instead of an as due basis?
B) If someone is working two jobs, why can the employers not deduct the "new correct" amount any time a threshold is hit?

It would seem simpler to deduct taxes as they are due, rather than pro-rating throughout the year, ie on the first $12,000 deduct 10%, then on the first dollar of the next $12,000 deduct 15%, and so on.

Answer 1

Income taxes are due when the income is earned. So from each salary paid you should pay the taxes due.

Re why the taxes are paid on assumption that you will keep your salary the same level - that's because that's the safest bet for most of the taxpayers. It would not be simpler doing what you suggested, especially because salary is not necessarily your only income and the employers cannot know that the 12K they paid you is all you earned. Tax is your personal responsibility. Also, changing rates throughout the year for all the employees is an accounting nightmare, and will lead to numerous errors, mistakes and glitches. It will also mean that the net amounts you receive will not be consistent - in the beginning of the year you receive more, then it goes down because the taxes go up, and as time passes - it goes down rather drastically (think of going 18% up in taxes in a month because you moved from the 10% to the 28% bracket throughout the year).

You can affect the withholding rates by changing your W-4, and instruct each of your employers how much to deduct (using the allowance and the additional withholding sum). This way you can ensure you pay enough taxes on all your earnings (including, for example, rents, capital gains, etc, not just salaries), as they're due (i.e.: when earned).

Answer 2

Well it looks like you have done the math right and understand the extreme cases.
Today there is nothing stopping companies from doing what you say, its just that

• Too complicated to compute.
• Too complicated for individuals to understand
• It's not what I like

Bob makes 2000 per month, less of taxes he would make 1750 and is happy to get the same amount every month.

But if we start the deductions your way, then initial months he gets more 1800 and the later months he would get 1700. Bob would be very unhappy that his net take home has actually gone down in-spite of working with the company for more than 6 months, the pay instead of increasing has actually decreased.

Most people like to know the fixed amount of money they get to spend :)

Answer 3

One complaint that is heard frequently is that when somebody gets a raise or bonus they end up with a smaller take home amount. This is a fallacy. But if the system collected taxes as you proposed they would feel increasing amounts of pain throughout the year.

If this was the way money was withheld it would be a nightmare for couples. The two companies would have to know what the other person was making, and update the amount each paycheck. If one got a 3K bonus the 2nd company would have to adjust accordingly.

Answer 4

That would result in varying rates of take-home pay for the employee, which many people are very bad at dealing with. Most people have very little 'float' cash from month to month, and their liabilities (food, commuting, rent/mortgage) are fixed from month to month. Varying income would result in cashflow problems and many people would end up taking out loans in the second half of the tax year to be repaid in the first half of the next.

Answer 5

Not answering "why" they do it this way, but the IRS specifically states that taxes on base pay are to be paid out assuming that pay is in equal portions throughout the whole year.

Answer 6

The other answers all address income tax withholding, but Q also tagged payroll taxes which in the US are Social Security (formally, OASDI) and Medicare, often grouped together as FICA, and sometimes Unemployment Insurance.

Social Security is a flat 6.2% on the chronologically first $X (cap amount varies by year) and so your withholding for that may stop partway through the year, and your net pay jump up as a result. See Why did my last paycheck of the year have a big decrease in Social Security taxes taken out?

Medicare tax (which is only for Part A or Advantage, other parts of Medicare are funded differently) is flat 1.45% on everything, except that beginning 2013 if you exceed $200k withholding starts for Additional Medicare Tax (form 8959) and net pay goes down; however that latter is part of 'Obamacare' (PPACA) which in 2017 the new President and legislative majority plan to 'repeal and replace'.

SS and standard Medicare tax are per person, not affected by filing status or any other income or deductions etc, so the withholding is always correct unless you work for multiple employers and your combined pay exceeds the cap, in which case you can get a refund of the excess withholding (as the instructions for line 71 on 1040 direct, see pub 505). Additional Medicare Tax (unless/until it gets 'replaced') is a little more complicated and you may need to adjust withholding or make estimated payments, but high earners are expected to cope with such things.

The Unemployment Insurance system is run primarily by the states, and most tax only the employer but some require an employee share, see https://www.adp.com/tools-and-resources/compliance-connection/state-taxes/2016-fast-wage-and-tax-facts.aspx . There is a Federal backstop funded by a Federal tax (FUTA) only on the employer.