How Do I Figure Federal Income Taxes Out of My Employee's Checks?
The Internal Revenue Service enforces the standards for federal income tax withholding. As an employer, you are required to withhold the tax from your employees' paychecks. Federal income tax is collectively based on the employee's W-4 data and the IRS withholding tax tables or Circular E.
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Withholding Form
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You need to give each of your new hires a W-4 form to complete. The employee puts her withholding conditions, such as exempt status, or allowances, filing status and additional federal income tax to be withheld per pay period on the form and submits it to you. The W-4 helps you to determine the amount of federal income tax to withhold from the employee's paychecks. If she fails to submit a W-4, withhold at single filing status with zero allowances. Each allowance the employee claims gives her an amount that reduces her taxable income. Therefore, if she has no allowances, she's liable for more federal income tax.
Wage Bracket Method
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Once you obtain the employee's filing status and allowances (as per lines 3 and 5 of his W-4), you likely can use the Circular E's wage bracket method to figure federal income tax withholding. Provided the employee's income is within the wage bracket earnings range, this method gives you the exact amount of tax to subtract from the employee's pay based on his allowances, wages, filing status and pay period. If the employee elects extra taxes to be withheld on Line 6 of his W-4, add the additional amount to the withholding amount you obtained from the Circular E.
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Percentage Method
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The percentage method is more in-depth than the wage bracket method. You can use it if the employee's earnings exceed the wage bracket's income limit. If the employee has allowances, you have to first figure out the amount the IRS allows per allowance for the tax year in question based on the employee's pay period. You can obtain this information from the Circular E; for example, see Page 35 of Circular E. Subtract the total allowances sum from the employee's wages. Then, use the Circular E percentage method table that matches the employee's pay period, filing status and wages after deducting allowances to figure the withholding.
Considerations
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If the employee qualifies for, and claims, exempt on her W-4, do not withhold federal income tax from her paychecks. Payroll software, such as QuickBooks, ZPAY, Ultimate Software and Sage Peachtree comes with the federal income tax tables hard-coded in the system; it calculates the withholding based on the employee's inputted W-4 information. You can use an online paycheck calculator to figure out an employee's federal income tax withholding and her gross-to-net earnings. Choose the hourly or salary calculator and input the relevant tax and payment information to process the employee's paycheck. The employee should submit a new W-4 when her personal or financial situation changes. If applicable, withhold federal income tax based on the new W-4.
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