Is an Employer Required to Take Out Federal Withholding From a Paycheck?
The Current Tax Payment Act of 1943 made it legally possible for the government to tax wage earners. The federal government collects this tax by requiring employers to withhold federal income tax from employees' paychecks. Social Security tax and Medicare are types of federal payroll taxes that employers are also required to withhold from a paycheck.
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Criteria
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The term "withholding" refers to the payroll deduction process employers use to withhold the tax the employee's paycheck. If the employee qualifies for exempt status, the employer does not withhold federal income tax from her paycheck. This is the only time federal income tax withholding does not apply to an employee. The employee must meet the criteria to qualify for exempt. An employee can claim exempt in 2010 if in the prior year she had a right to a refund of her federal income tax withholding because she owed no taxes, and if in the current year she expects a refund because she anticipates owing no taxes.
Additional Taxes
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Social Security tax and Medicare tax are collected under the authority of the Federal Insurance Contributions Act. Only certain employees are exempt from FICA taxes, such as nonresident aliens and non-immigrants with specific types of visas. Both the employer and the employee pay Social Security tax at 6.2 percent of gross income, up to the yearly wage limit of $106,800, and Medicare tax at 1.45 percent of all gross earnings.
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W-4 Form
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The employer gives all new employees a W-4 form to complete. The form helps the employer to determine the amount of federal income tax to withhold from the employee's paycheck. The employee states her allowances and filing status on the form; the employer uses the form and IRS Circular E's withholding tax tables to figure the withholding tax. If the employee neglects to submit a W-4 form, the employer withholds federal income tax at single with zero allowances. If the employee turns in an invalid W-4, the employer should give it back to him and request a valid one. An example of an invalid W-4 is if the employee claims exempt plus allowances on the W-4 form. The IRS may charge a $500 fine to employees who submit a false W-4.
Income Tax Calculation
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There are two ways to figure the exact amount of federal income tax to withhold from a paycheck: the Circular E's wage bracket method and the percentage method. The former is simpler because it gives the precise amount of tax to withhold based on the employee's allowances, filing status, gross income, and pay period. However, it has a wage limit, and the employer cannot use it if the employee claims more than 10 allowances. The percentage method is acceptable in any situation. In this case, the employer subtracts the total amount allowed for allowances from the employee's gross pay to arrive at the taxable wages. Then it uses the percentage method table relevant to the employee's pay period and filing status to figure the tax.
Considerations
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The employer pays and reports FICA taxes and federal income tax withholding, together, to the IRS. Most employers pay either semi-weekly or monthly; and perform quarterly or annual reporting.
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References
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