How to Figure Tax Deductions From Paycheck
Employers are legally responsible for deducting from paychecks an employee's withholding for income tax plus taxes for contribution to Social Security and Medicare. Although these are taxes on the employee, they are calculated and remitted by employers. Income tax withholding is determined using information provided by the employee on a Form W-4. The only other federal tax deductions from paychecks are the employee's contributions to Social Security and Medicare. These taxes are fixed percentages of compensation, regardless of whether any withholding for income tax is required.
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Things You'll Need
- Form W-4
- Internal Revenue Service Publication 15---Employer's Tax Guide
Instructions
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Obtain a completed Form W-4 from an employee.
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Withhold employee income tax from compensation according to tables provided by the Internal Revenue Service. The applicable table is based on the employee's gross wages, the frequency that compensation is paid, the employee's marital status and the number of withholding allowances provided on Form W-4.
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Deduct employee contributions to Social Security and Medicare according to the applicable rates provided by the Internal Revenue Service. As of 2010, the combined rate for these taxes is 7.65 percent.
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Tips & Warnings
Certain types of compensation are subject to FICA taxes but exempt from income tax withholding. This includes employee contributions to an employer-sponsored retirement plan. Some types of employee benefit plans are subject to income tax withholding but not FICA taxes. To determine the tax treatment for each type of compensation other than salary and wages, refer to the special rules table published by the IRS in Publication 15 -- Employer's Tax Guide.
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. The excluded benefits are not subject to federal income tax withholding. Also, in most cases, they are not subject to Social Security or Medicare taxes.
There is an annual threshold for the amount of wages to one employee that are subject to Social Security tax. That limit is adjusted annually for the cost of living. There is no wage threshold for Medicare tax.
