Calculating Tax to Withhold: An Intro for Employers

If you’re starting a business, it’s important to understand how to withhold taxes to adhere to state and federal laws. Read further to learn more about payroll withholding taxes, why they’re important and how to use the W-4 form to calculate withholdings.

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What are payroll withholding taxes? Why are they important?

Payroll withholding taxes are taxes that employers take from their employees’ wages, compensation and other earnings to pay to the state and the federal governments. According to the Center on Budget and Policy Priorities, payroll withholding taxes fund insurance systems such as Medicare, Social Security and other programs.

Related: Onboarding Best Practices

 

What is the W-4 form and what is its role in tax withholding?

according to the IRS, is an "Employee’s Withholding Certificate," which is a tax form issued by the Internal Revenue Service (IRS) that employees in the United States are required to fill out so that their employers can determine how much tax to withhold from their employees’ paychecks. Here are the key components of the W-4 form in 2020:

  • Step 1: Enter Personal Information
  • Step 2: Multiple Jobs or Spouse Works
  • Step 2(b): Multiple Jobs Worksheet
  • Step 3: Claim Dependents
  • Step 4: (optional) Other Adjustments
  • Step 4(b): Deductions Worksheet
  • Step 5: Sign 

 Related: New Employee Forms

 

How to calculate withholdings using the W-4 form

 According to FreshBooks, here’s a guided list of steps to help you calculate your employees’ withholdings using the W-4 form:

 

1. Organize employee documents

First, make sure you have important employee documents on hand to help you with your calculations. For each employee you should have:

  • Employees’ completed W-4 forms
  • Payroll period schedule
  • Paystubs

 

2. Choose your calculation method

There are two methods you can use to calculate the amount of tax to withhold from each of your employees: the wage bracket method or the percentage method.

 

3. Using the wage bracket method

This method can only be used for employees making $100,000 or less in annual income. To get started, access the IRS Publication 15-T document. Use the wage bracket method instructions that start on page seven.

 

4. Using the percentage method

Similar to the wage bracket method, access the IRS Publication 15-T document to use the percentage method. Use the percentage instructions that start on page four automated payroll, and page 51 for manual payroll.

 

Tax withholding FAQs

 

What is the withholding tax rate?

The withholding tax rate can depend on the level of income your employee receives. Here are the tax rate percentages, according to the IRS, that employers should withhold at each income level if Step 2 (Multiple Jobs or Spouse Works) is not checked on an employee’s form:

Married Filing Jointly 

  • $0 – 0%
  • $11,900 – 10%
  • $31,650 – 12%
  • $92,150 – 22%
  • $182,950 – 24%
  • $338,500 – 32%
  • $426,600 – 35%
  • $633,950 – 37%

Single or Married Filing Separately

  • $0 – 0%
  • $3,800 – 10%
  • $13,675 – 12%
  • $43,925 – 22%
  • $89,325 – 24%
  • $167,100 – 32%
  • $211,150 – 35%
  • $522,200 – 37%

Head of Household

  • $0 – 0%
  • $10,050 – 10%
  • $24,150 – 12%
  • $63,750 – 22%
  • $95,550 – 24%
  • $173,350 – 32%
  • $217,400 – 35%
  • $528,450 – 37%

Here are the tax rate percentages employers should withhold at each income level if Step 2 (Multiple Jobs or Spouse Works) is checked on an employee’s form:

Married Filing Jointly 

  • $0 – 0%
  • $12,400 – 10%
  • $22,275 – 12%
  • $52,525 – 22%
  • $ $97,925 – 24%
  • $175,700 – 32%
  • $219,750 – 35%
  • $323,425 – 37%

Single or Married Filing Separately

  • $0 – 0%
  • $6,200 – 10%
  • $11,138 – 12%
  • $26,263 – 22%
  • $48,963 – 24%
  • $87,850 – 32%
  • $109,875 – 35%
  • $265,400 – 37%

Head of Household

  • $0 – 0%
  • $9,325 – 10%
  • $16,375 – 12%
  • $36,175 – 22%
  • $52,075 – 24%
  • $90,975 – 32%
  • $113,000 – 35%
  • $ 268,525 – 37%

 

When is withholding tax payable?

The IRS states that employers should pay taxes to the government by the end of each month throughout the year. There are two different schedules you can use depending on the pay periods your company has: monthly or semi-weekly.

 

Are there different types of withholding taxes?

There are a few different types of withholding taxes used for different situations. Here are some examples, according to Investopedia:

  • Wage withholding for U.S. employment
  • Backup withholding for interest/dividends
  • Withholding on foreign person’s income payments
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