How Much to Withhold in Payroll for Federal Taxes

The employee typically files her annual tax return on Form 1040.

The Internal Revenue Service is the agency responsible for administrating, enforcing and collecting federal taxes. Federal payroll withholding taxes include federal income tax, Medicare tax and Social Security tax, and the employer withholds these taxes from employees' pay. The calculation and withholding amount vary by tax.

Federal Income Tax

Federal income tax is based on the employee's W-4 data, including her filing status and allowances (as shown on lines 3 and 5), and the IRS Circular E's federal withholding tax tables. Before you determine the withholding amount, ensure you are using the Circular E specific to the tax year you are computing. You can use the Circular E's wage bracket method, which gives the exact withholding amount according to the employee's income, pay period, filing status and allowances. Apply the percentage method if she has more than 10 allowances and if her income exceeds the wage bracket method limit. Use the Circular E allowance table (see page 37 of the 2010 copy) to determine her total allowances sum. Subtract the sum from her gross income, then use the percentage method table (see page 39) relevant to her filing status, pay period and taxable wages to figure the withholding.

Social Security Tax

You can obtain the most recent Social Security tax withholding rate from the Circular E or from the Social Security Administration (SSA) website. As of 2010, Social Security tax has remained unchanged at 6.2 percent of gross income since 1990. The annual wage limit of $106,800, which applies to tax year 2011, has been unchanged since 2009. Once the employee reaches the yearly wage base, do not withhold any more Social Security tax from his paychecks for rest of the year.

Medicare Tax

The Medicare tax withholding rate also is available in IRS Circular E and on the SSA website. As of 2010, the rate has remained unchanged at 1.45 percent of gross income since 1990. Unlike Social Security tax, Medicare has no annual wage limit and is therefore withheld from all wages.

Considerations

The employer pays all federal withholding taxes to the IRS. The Circular E has the payment schedule, which varies by employer, but typically occurs on a semiweekly or monthly basis. The employer also reports federal withholding taxes to the IRS, usually on a quarterly basis with Form 941.

References

• IRS: Form W-4
• IRS: 2010 Circular E
• Social Security Administration: Social Security and Medicare Tax Rates
• Social Security Administration: Contribution and Benefit Base