Federal Taxes
In addition to Social Security and Medicare tax, employers must also withhold federal personal income tax from each separate taxable wage payment made to employees. Employee personal income tax liabilities vary widely, so the exact amount of federal income tax that an employer must withhold from an employee’s pay also varies.
Basically, how much federal income tax an employer must withhold from a particular wage payment will vary, depending on: the frequency of the company’s payroll period, for example, weekly, bimonthly, semimonthly, etc.; the employee’s marital status; the number of withholding allowances or exemptions the employee claims on Federal Form W-4; and the amount of the wage payment.
While there are several methods that employers can choose from to calculate the proper amount of income tax withholding, most employers use one of the two methods that utilize standard tables developed by the IRS — the wage bracket method or the percentage methods. The wage bracket method is the simplest method to use. However, it cannot be used in all situations. Therefore, many employers prefer to use the percentage method. The percentage method is also commonly used in commercial payroll tax software programs.
Under the wage bracket method, employers use a set of ten tables to calculate the proper amount to withhold. The wage bracket tables show the specific amount to withhold based on: an employee’s marital status, single or married; the payroll period, weekly, biweekly, semimonthly, monthly, and daily or miscellaneous pay periods; the number of withholding allowances claimed; and the wages paid.
Employers select the table corresponding to their particular pay period and their employee’s marital status and find the wage bracket within which the employee’s wages fall. They can then read across the table to the column that reflects the amount of withholding exemptions the employee has claimed on Federal Form W-4 and to find how much to withhold.
Under the percentage method, employers use a set of eight tables to calculate the proper amount to withhold. The percentage method allows employers to manually calculate the amount to withhold based on the payroll period and the employee’s marital status, after subtracting the value of the employee’s withholding allowances.
Percentage method tables are broken down by pay period frequency, weekly, biweekly, semimonthly, monthly, quarterly, semiannually, annually, and daily or miscellaneous with two marital status sub-tables within each payroll period table. After subtracting the value of the employee’s withholding allowances, which vary depending on the pay period frequency, employers select the table corresponding to their payroll period and the employee’s marital status and find the wage bracket within which the employee’s adjusted wages fall. The tax withheld is then calculated using the formula outlined in the table, a base amount plus a percentage of the adjusted wages exceeding the wage bracket minimum amount.
Both sets of tables can be found in IRS Publication 15, Employers Tax Guide, and are updated at the beginning of each tax year.
Employers can also use one of the alternative methods, annualized wages, average estimated wages, cumulative wages and part-year employment, all of which are outlined in IRS Publication 15-A, Employers Supplemental Tax Guide, to calculate the proper income tax withholding. However, these methods are far more complicated than either the wage bracket or percentage methods and really don’t provide much cost savings for employers. In fact, they may actually make for more of an administrative burden unless an employer can utilize some form of automated technique to perform the calculations.
