What are payroll withholding taxes?
Payroll withholding taxes are taxes that employers deduct from their employees’ wages, compensation and other earnings to remit to the state and federal governments. According to the Center on Budget and Policy Priorities, payroll withholding taxes fund insurance systems such as Medicare, Social Security and other state and federal programs.
“These state and federal programs include the Federal Insurance Contributions Act (FICA), Federal Income Tax (FIT), state and local income tax and State Disability Insurance (SDI), to name a few.”
—Tarik Griffith, accountant
Form W-4 and its role in tax withholding
Form W-4 is an “Employee’s Withholding Certificate” issued by the Internal Revenue Service (IRS) that employees in the United States complete to help their employers determine how much tax to withhold from their paychecks. Completing this form is often part of the employee onboarding process.
Key components of Form W-4 include:
- Personal information, such as contact information and marital status
- Information on multiple jobs or spouse’s work, if applicable
- Claiming dependents and other credits, if applicable
- Other adjustments, such as other income, deductions or extra withholding
How to calculate withholding using Form W-4
Here’s how to calculate new employees’ withholding using Form W-4:
Organize employee documents
To help with your calculations, verify you have all essential employee documents, including those for contractors, available. This may include:
- A completed employee Form W-4
- Payroll period schedule
- Pay stubs
Choose a calculation method
There are two methods businesses can use to calculate the amount of tax to withhold from each employee: the wage bracket method, which is easiest but limited to lower-income earners or the percentage method, which is more complex, more accurate and is often required for high earners. Both rely on IRS Publication 15-T, which is updated annually.
Calculate using the wage bracket method
The wage bracket method applies only when an employee’s wages and pay frequency fall within the ranges covered by the Publication 15-T wage bracket tables. Employers should consult the current Publication 15-T to determine whether a specific employee’s pay and frequency are covered rather than relying on a single universal dollar cutoff.
To get started, access the IRS Publication 15-T document and use the wage bracket method instructions that start on page seven. The IRS Publication 15-T table automatically adjusts for standard deduction, dependent credits and multiple-job factors.
Calculate using the percentage method
Similar to the wage bracket method, use the percentage method outlined in IRS Publication 15-T. Refer to the percentage-method instructions in the current year’s Publication 15-T for automated and manual payroll procedures. These individuals typically have complex tax situations, such as multiple jobs or irregular bonuses, and their employers use manual payroll setups or custom calculations.
This article is for informational purposes only and does not constitute financial advice. Consult with a licensed financial professional for any issues you may be experiencing.
