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This may be a terribly stupid question, but how do they figure out how much to take out of my paycheck if they do the final tax bracket calculation at the end of the year? How does it work out to be the right amount?

The only stupid question is the one that isn't asked. Your employer determines how much to take out of your paycheck from information you provide via the W-4 form. If you just follow the simple worksheet on the front of the form, your withholdings are based on your filing status, the number of personal exemptions you will claim on your final return, a standard deduction, and child care credits. Your income is assumed to come solely from your employer's wages.

You have the option of completing the longer worksheet on page 2 which will adjust your withholdings to account for other sources of income or adjustments/deductions/credits.

Bottom line, your withholdings only turn out to be the right amount if you do the calculations right. Your employer doesn't do a tax bracket calculation as such. S/he takes your annual salary (or pay period wages x # pay periods in the year), subtracts (the number of withholding allowances x value of one allowance [$2800 in 2000]), calculates the income tax on what's left, and divides by the number of pay periods to determine how much to withhold from that paycheck.

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