How Much Do I Withhold From My Employee's Income for Taxes?

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As an employer, if you do not withhold the required taxes from your employees’ income you can face penalties, fees and interest from the Internal Revenue Service and, if applicable, the state revenue agency. You withhold each tax according to the calculation the agency requires.

FICA Rates

FICA taxes include Social Security and Medicare taxes; both are collected under the authority of the Federal Insurance Contributions Act. As of 2011, employers must withhold Social Security tax at 4.2 percent of the employee’s gross income, up to $106,800 for the year; and 1.45 percent of all gross income for Medicare tax. If the employee has a cafeteria plan, such as a Section 125 dental or medical plan, withhold the benefit before you withhold FICA taxes from her gross pay. A cafeteria plan is one that takes money out pre-tax, and that meets the criteria of Section 125 of the Internal Revenue Code.

Federal Income Tax

To withhold federal income tax, consult the employee’s W-4 form for his filing status and allowances on lines 3 and 5, and make note of any additional tax he opted to be withheld on line 6. Use the IRS Circular E withholding tax table for the correct tax year that matches the employee’s filing status, allowances, pay period and wages to obtain the withholding amount; if applicable, add elected additional withholding from line 6 of the W-4 to the total you get from the Circular E. If the employee has a qualifying pretax deduction, such as a traditional 401(k) plan or a cafeteria plan, subtract the benefit from his gross income before withholding federal income tax.

State Income Tax

If the employee’s work state charges state income tax, withhold it according to the state revenue agency’s policies, which vary by state. For example, if she works in Pennsylvania, as of 2011, withhold at 3.07 percent of her gross compensation. But if she works in Georgia, use the state withholding tax tables and the employee’s state withholding allowance certificate to figure the withholding. Check with your revenue agency for allowed pretax deductions.

Considerations

If the employee is exempt from income tax, as shown on his W-4 or state tax form, do not withhold the respective tax from his pay. Check with your state revenue agency for additional taxes, such as city and local income tax, which may apply. Further, if state disability insurance withholding applies, ask your state agency for the withholding amount and limit. You pay FICA taxes and federal income tax withholding to the IRS and state withholding taxes to the respective state agency.

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