What Percent of Pay Is Withheld for Federal Taxes?
Employers are required by law to withhold wages from employees' paycheck to fulfill federal tax requirements. Federal taxes include federal income tax, Social Security tax and Medicare tax. The percentage for federal income tax varies by employee. The employer withholds Medicare and Social Security at a flat percentage.
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Significance
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Federal income tax, established in 1943, funds national programs such as law enforcement, defense, foreign affairs and community development. Social Security tax -- first collected in 1937 -- provides benefits to the disabled, retirees and their dependents. Medicare tax -- which allowed beneficiaries to first sign up in 1966 -- provides employees, retirees and their spouses with hospital insurance when they reach age 65.
Withholding Process
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The employer gives new employees a W-4 form to complete. The employee states her filing status, allowances and other federal income tax withholding conditions on the form. The employer uses the employee's W-4 and IRS Circular E to figure federal income tax withholding. It can use the Circular E's wage bracket method, which gives the precise amount of tax to withhold according to the employee's pay period, wages, allowances and filing status. It can use this method only if the employee's wages are within the wage bracket's income range and if the employee claims less than 10 allowances.
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FIT Percentage Method
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The employer can use the Circular E's percentage in any situation, including if the employee's wages exceed the wage bracket's income limit. The employer determines the total allowances from line 5 of the employee's W-4. It subtracts the amount the IRS gives for each allowance -- as shown on page 37 of the 2010 Circular E -- from the employee's gross income. Then it uses the percentage method table relevant to the employee's pay period, filing status and wages after subtracting allowances to figure the withholding amount.
FICA Percentage
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The Federal Insurance Contributions Act is the law that governs the collection of Social Security and Medicare taxes. Since 1990, and as of November 2010, the FICA tax rates have remained unchanged: 6.2 percent of gross income for Social Security tax and 1.45 percent for Medicare tax. The yearly wage maximum for Social Security tax is $106,800. Medicare tax has no yearly wage base.
Considerations
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The employer pays federal taxes to the IRS, typically semi-weekly or monthly. It reports federal income tax, Social Security tax and Medicare tax liabilities, together, to the IRS. Most employers conduct quarterly reporting via Form 941, Employer's Quarterly Federal Tax Return. The employer reports the employee's wages and taxes withheld for the year to the Social Security Administration via Form W-2.
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References
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