Federal Tax Withholding Information
Employers are required to withhold federal payroll taxes from employees' paychecks; hence, federal tax withholding. The latter is a statutory requirement, which both the employer and the employee must abide by. The conditions surrounding each type of federal withholding vary.
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Types
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Federal tax withholding includes federal income tax, Social Security tax and Medicare taxes. Individual state governments enforce state income tax, but the federal government enforces federal withholding taxes. Federal income tax is used to provide funding for national programs, including law enforcement and defense. Social Security tax provides retirement benefits to retirees and their dependents. Medicare tax provides medical benefits to eligible individuals, such as retired employees and their spouses, when they reach age 65.
Agency
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The Internal Revenue Service (IRS) is the agency of the Department of Treasury. According to the IRS, it is one of the most effective tax administrators in the world, collecting more than $2.3 trillion in earnings and processing in excess of 236 million tax returns. The IRS' goal is to enforce the tax laws and to give taxpayers the assistance they need to understand and comply with such laws.
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Withholding Mediums
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The Federal Insurance Contributions Act (FICA) authorizes Social Security and Medicare tax. The government sets the FICA tax rate, which both the employer and the employee must pay. Each pays 6.2 percent of gross earnings, up to the yearly wage base of $106,800 for Social Security tax, and 1.45 of all gross earnings for Medicare tax.
The employer must give new hires a W-4 form to complete, which indicates the latter's exemptions and filing status. The employer uses this information and the IRS withholding tax tables for the appropriate tax year to determine the federal income tax. The employer pays all federal withholding taxes to the IRS.
Publications
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To help employers stay abreast of the changing payroll tax laws, the IRS sends those it has on file an updated Circular E/Publication 15 each year. Circular E instructs employers on how to withhold federal tax and how to report and pay them to the IRS. It also contains the withholding tax tables needed to compute federal income tax.
Publication 919 helps employees understand how to adjust their tax withholding. If the employee does not pay enough income tax, he ends up owing the IRS. If he pays too little, he loses money and has to wait until tax time for a refund. Publication 919 advises the employee on how he can avoid having too much or too little tax withheld.
Statistics
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According to the Tax Policy Center, payroll taxes for Medicare, Social Security, some retirement plans, and unemployment benefits resulted in federal income of $870 billion in 2007. Furthermore, from 1960 to today, the payroll tax portion of federal earnings rose from one-sixth to exceeding one-third.
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