For the second part of this article series for employer tax tips, we will be focusing on the procedure to calculating payroll tax withholdings from employees. States and municipalities can impose their own additional payroll taxes, but for this piece we will be focusing solely on the federal level, which entails wage withholdings for the federal income tax, Federal Unemployment Tax Act (FUTA), Social Security (SS), and Federal Insurance Contribution Act (FICA) tax.
New employees must submit to employers the completed IRS Form W-4, officially named the “Employee’s Withholding Allowance Certificate”, because it notes any allowances or exemptions to be claimed and will affect how their withholdings will be calculated. For example, if your employee has dependent children under their care or happens to be working multiple jobs, the calculation on your withholding from that employee’s wages will need to be adjusted.
Third Party Payroll Tax Arrangements
Employers can opt for outside contractors, such as payroll service providers like Paychex, to handle payroll taxes and proper withholdings for them. However, the employer will still be responsible for the proper withholdings and any tax liabilities.
Figuring Federal Income Tax Withholdings
There are different ways to calculate income tax withholdings from employee wages. Two of the most used methods are the percentage method and the wage bracket method.
- Wage Bracket Method The wage bracket method is probably the simplest method in calculating income tax withholdings. The IRS has laid out tables based on the filing status (single, married, etc.), the payroll period (weekly, biweekly, etc.), and range of income earned in the period to determine the amount of wages to be withheld. Using the info from the employee’s W-4, use the correct table to find the amount to withhold. The tables can be found in IRS Publication 15. Below is a sample section from a table to illustrate how they appear.
| Wage Bracket Method Tables for Income Tax Withholding | ||||||||||||
| SINGLE Persons—WEEKLY Payroll Period | ||||||||||||
| (For Wages Paid through December 31, 2016) | ||||||||||||
| And the wages are– | And the number of withholding allowances claimed is— | |||||||||||
| At least | But less than | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| The amount of income tax to be withheld is— | ||||||||||||
| 80 | 85 | 4 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 85 | 90 | 4 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 90 | 95 | 5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 95 | 100 | 5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 100 | 105 | 6 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
- Percentage Method Based on the filing status, payroll period, withholdings, and a range of income, a percentage is applied to the wages earned to determine the amount of income tax withheld. The percentages and withholding amounts can also be found on IRS Publication 15.
Let’s use an example to illustrate the methods.
Jorge works for a biomedical supplies firm based out of Irvine, CA. He is single and claims only one personal withholding on his W-4. The firm pays him biweekly and each paycheck is $750.
Using the wage bracket method, we look at the IRS table from Publication 15 for single, biweekly pay and look in the wage range of “740 to 760” and find that based on his one withholding that his income tax to be withheld is $58.
Using the percentage method, we start with his gross pay of $750 then refer to IRS Publication 15 for the amount to subtract for his one withholding based on his filing status, in this case it is $155.80 for a single person paid biweekly. Then we take the amount ($750-$155.80=$594.20) and refer in the publication to the appropriate percentage table Jorge’s biweekly pay falls under, which in this case is single, biweekly and an income above $443 but not above $1,535. The withholding amount is listed as “$35.60 plus 15% of the excess above $443.” So now we take Jorge’s wages after the withholding amount and subtract it to get the ‘excess above’ $443 ($594.20-$443=$151.20). Finally, multiply that number against the percentage ($151.20 x .15=22.68) and add it to the withholding amount ($35.60+22.68=$58.28). The amount to be withheld is approximately the same as the wage bracket method.
The wage bracket is a far simpler and less time-consuming method, but the percentage method may be more useful for those with higher income or those with many withholdings that may not be included on the IRS tables.
Stay tuned for last part of this series on employee taxes! We will be going over the other parts of employee federal payroll taxes, FUTA, FICA, and social security taxes.
Figuring out federal income tax may seem a bit challenging at first, but practice breeds familiarity and confidence. It may be even more helpful if you had a trusted tax advisor make sure those withholdings are done right. We would be glad to assist you with that! MiklosCPA is a California-based accounting and tax advisory firm who has helped many clients with their taxes and accounting. If you would like to learn more about our services, contact us!