Tax Withholding Limits
Federal and state revenue agencies determine tax withholding limits--the amount of payroll tax the employer is legally required to withhold from employees' paychecks.
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Types
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The Internal Revenue Service (IRS) requires employers to withhold federal income tax, Social Security tax and Medicare tax from employees' income. Most states have a revenue/taxation agency that requires state income tax withholding. States may have additional withholding requirements, such as Ohio's school district tax withholding. Cities such as New York City and Yonkers may also require city income tax withholding.
Limits
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Social Security tax is calculated at 6.2 percent of gross wages, up to the annual wage limit of $106,800 (as of 2010). Once the employee has earned this amount for the year, the withholding stops for that year. Medicare tax is calculated at 1.45 percent of gross wages; this tax has no annual wage limit and is withheld from all wages. The federal income tax withholding limit depends on the employee's filing status, allowances and the IRS withholding tax tables. State and local income tax withholding vary by state.
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Considerations
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The employer must follow the respective revenue agency's guidelines when withholding taxes. IRS Circular E (Withholding from Employee Wages Section) has the federal tax withholding guidelines. The state revenue agency typically provides the state withholding guidelines on its website.
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References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
