Of the many words that employers dread, one is ‘taxes’. Employers pay several kinds of taxes and also deduct taxes from their employee’s wages and then pay them forward. One of them is the federal income tax. 

It is always advisable for employers to equip themselves with all the basic knowledge pertaining to filing and withholding taxes. 

In this article, you will explore income tax withheld by employers and how it’s calculated.

What Is Federal Income Tax Withholding?

Federal income tax withholding is when an employer withholds a certain amount from an employee’s paycheck to send to the federal government. 

When the tax season is around the corner, employers have to file for the taxes they either get a refund back or owe some additional taxes to the government. A lot of employees think that the refund they receive is like getting free money. It is quite not the case. In fact, this is the employees’ hard-earned money that they have been sending to the government free of interest. Interesting isn’t it?

It is advisable to have a balanced approach. With too little federal income tax withheld, you will end up owing more to the government and with too much withheld, you pay a substantial amount to the government free of cost. Thus, it is better to check with your employer before the tax season hits. 

How Does Tax Withholding Work?

Everyone in the US who earns an income has to pay income tax to the federal government. All employees have to fill in a W-4 form. But what is the W-4 form and what does it entail?

Form W-4

All employees have to fill in a W-4 form in order for employers to decide the income tax that needs to be deducted from their paycheck. But what is the W-4 form in the first place?

The W-4 Form is a document that all employees have to fill as soon as they start working for a company. In that document, employees mention their marital filing status, number of dependents, contact information, and social security number. 

  • Employees who are single have the highest amount of federal income tax withheld from their paychecks. 
  • Employees who are single but having one dependent have comparatively less federal income tax withheld. 
  • Similarly, employees who are married or file their status as the head of household have even less federal income tax withheld. 

Federal Income Tax Withheld

What Is a Withholding Allowance?

Until 2020, employees used withholding allowances in the W-4 Form as exemptions to claim from federal income tax. Withholding allowances were used to determine the withholding amount on an employee’s salary. The more allowance an employee claims, the less federal income tax is withheld. 

However, the new W-4 Form no longer has the withholding allowance option. 

How to Calculate Federal Income Tax Withheld?

In order to calculate the withholding amount, you have to collect all the relevant information from W-4 Forms followed by reviewing any withholding allowances. you have to follow four steps to get this sorted. 

Gather Relevant Documents 

  • First of all, you need to collect all relevant documents to determine the withholding tax amount. 
  • For that, you have to review the W-4 Form thoroughly as it takes into several factors such as filing status.
  •  Once that is done you need withholding tax tables and an IRS worksheet to proceed with the calculation. 

Review W-4 Forms 

Factors that determine the tax withholding amount are found in the W-4 Form. therefore, you must review the form in detail to check for an employee’s filing status, number of dependents they support, any additional information pertaining to, and any additional amount that an employee wants to be withheld.

Go Through Payroll Details 

Next up is reviewing the payroll details of your employees. Basically, you have to determine two things:

  • The payroll period is how frequently do you pay our employees that is weekly biweekly or monthly 
  • The total amount paid in a payroll period either in terms of a salary or wage is also known as the gross pay amount. 

Select Calculation Method 

Finally, you have to choose a calculation method once you have collected all the information from W-4 Forms and payroll. You have the option of choosing either of the following. 

  • Wage bracket method 

This is the simplest way of calculating withholding tax amounts. All you have to do is find each employee’s wage range in the IRS income tax withholding table

  • Percentage method 

This is a slightly more complex method of calculating withholding amounts and requires employers to follow a certain set of instructions. Instructions generally depend on whether a business uses a manual or an automated payroll system. 

What Percentage of Federal Income Tax Is Withheld?

How much will an employer withhold from an employee’s paycheck depends on an employee’s filing status and their taxable income. Basically, the tax system in the United States works progressively which means that the higher the income, the higher the federal income tax withheld. 

The government decides how much taxes an employee pays by dividing their taxable income into tax brackets

Federal Income Tax Withheld

Does Federal Income Tax Withheld Include Social Security?

What Is a Social Security Tax? 

It is a payroll tax that all employers and employees have to pay in the US. An employer withholds this amount from an employee’s paycheck and based on their salary makes a contribution.

The social security tax amount is used by the federal government to help widowed, retired, old aged, and disabled individuals. 

Social Security Tax Rate 

The Social Security tax rate is 12.4%. It is split between both the employer and employee. The employer deducts 6.2% off the employee’s paycheck and pays the remaining half off the employee’s wage. The split is done to ensure that employees don’t have to contribute more than 10% of their paycheck for one type of tax. 

The wage base for social security tax is $142800. Once the employee surpasses this amount, the employer will stop withholding any social security amount. 

Social Security Calculator 

It is pretty simple to calculate the social security tax. You only multiply an employee’s wage by the social security tax rate. At this point, you will not consider the frequency with which you pay your employees.  

Social Security= Employee’s wage x social security tax rate 

For instance, you pay an employee $1000. You will multiply $1000 by 6.2% to calculate the social security amount. In this case, you will withhold $62 from your employee’s wage. 

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Why Was No Federal Income Tax Withheld From My Paycheck?

In case you are wondering why no federal income tax is withheld from your paycheck, you may want to ask your employer about it. Usually, there are four reasons for not doing so:

  • If you are an independent contractor, your employer will not withhold any tax from your paycheck. 
  • You may have claimed an exemption from any withholding on your W-4 Form. However, you have to fulfill certain requirements in order to seek an exemption from tax. HR will be able to guide you. 
  • Your employer may have handed you an incorrect W-2 Form. in that case, you will have to ask your employer to replace it with a correct one. 
  • Just a mistake on your employer’s part could also be a reason. If your employer doesn’t withhold the correct amount then all you have to do is ask them to rectify it. The reason being that when the tax season hits, you will have a certain amount accrued as unpaid taxes. 

Why Is My Federal Income Tax Withholding So High?

At times you might wonder why the federal income tax withheld is so high. Well, federal income tax is a progressive tax which means it increases as your pay increases. 

When to Check Your Withholding?

It is important that your employees check their withholdings in the following scenarios:

  • As early as possible in the year
  • When tax laws are revised 
  • When an employee gets through major life changes such as:
    • A marriage or divorce
    • The start or end of a job
    • Adoption or birth of a child

When to Report Federal Income Tax?

In order to report the amount of federal income tax you deposit, you have to fill either of the following forms:

Form 941

This form has to be filled in the last month of every quarter. 

Form 944

This form is due on the year-end that is January 31. 

How to Fix Federal Income Tax Withholding Errors? 

To err is to be human. But one should make an effort to correct should there be any mistakes. In case of any errors on your part, you should immediately correct them by filing a corrected form

How to Keep a Check on the Paycheck?

It is better to use a tax withholding estimator to ensure that you have the right amount of tax withheld from your paycheck. 

How To Avoid Tax Penalty?

In order to avoid the tax penalty for underpaying your taxes, you should pay as you go. It is advisable to adjust withholding on your paycheck. 

There are two scenarios that you may want to keep an eye out for. First, if you deposit too much tax, you have to submit the corrected form to the IRS for a refund. On the contrary, if you withhold or deposit too little, use the corrected form and make a payment to the IRS for the amount you owe. 

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