How to Withhold Income Tax in the State of Indiana
The Internal Revenue Service (IRS) requires employers to withhold federal payroll taxes from employee paychecks. The criteria apply to federal income tax, Social Security tax and Medicare tax, regardless of the employee's work state. However, the state may have its own payroll tax withholding requirements. The state of Indiana requires you to withhold both state and county income tax from employee wages. You must follow the criteria for each tax when withholding income taxes in Indiana.
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Things You'll Need
- IRS Circular E
- W-4 Form
- Indiana Tax Table
- Indiana Employee Withholding Certificate
Instructions
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Give new hires IRS Form W-4 to complete for federal income tax withholding. The W-4 lets you know the employee's withholding conditions necessary to figure the tax. If an existing employee needs to change his federal income tax withholding conditions, have him complete a new W-4
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Use IRS Circular E and the employee's W-4 form to compute federal income tax. Retrieve the employee's filing status and allowances from the W-4 and use the Circular E's withholding tax tables to do the calculation. If the W-4 shows that the employee claimed exempt, do not withhold federal income tax.
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Calculate Social Security and Medicare tax. Figure Social Security at 6.2 percent of gross earnings, up to the yearly wage base of $106,800. Figure Medicare at 1.45 percent of all gross earnings. Notably, the employer pays an equal portion of these two taxes.
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Give new hires Form WH-4, Indiana Employee's Withholding Exemption and County Status Certificate to complete. Similar to Form W-4, this form informs you of the employee's state withholding conditions. Additionally, it lets you know the employee's residence and work county so you can apply the appropriate county income tax rate.
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Use the Indiana withholding tax table and the employee's state withholding certificate to figure state and county income tax. The table consists of two parts: A for personal exemptions and B for dependent exemptions. There's also a table that has the county income tax rates.
Suppose the employee earns $1,200 biweekly, claims two personal exemptions and three dependents, and is subject to the resident county tax rate of .01. Per Indiana's withholding instructions, effective December 1, 2009, you would calculate as follows: $1,200 - $76.92 for two personal exemptions - $173.07 for three dependents = $950.01--wages subject to state and county income tax.
Indiana does not have state income tax brackets. So you would withhold state income tax at the required percentage of 3.4.
State income tax calculation: $950.01 x .034 = $32.30.
County income tax calculation: $950.01 x .01 = $9.50.
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Tips & Warnings
Indiana's county income tax rates are narrowly defined by resident and non-resident rates. Contact the Indiana Department of Revenue if you're unsure of which county income tax rate applies. The Department also updates its tax tables periodically. For example, as of August 2010, the most recent tax table affects wages paid after November 30, 2009. Payroll software has the federal ,state and county income tax rates hard-coded in the system.
References
Resources
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