What Is Withholding

Withholding, in general, usually refers to a deduction of money (as 'withholding tax') from an employee's wages or salary by an employer, for projected or actual Income tax liabilities.

You must withhold and pay Federal and State payroll taxes such as Social Security, Medicare, Unemployment Insurance, and personal income tax if the basic withholding requirements are met.
 

In the United States income tax system, employers are required to withhold a portion of each employee's income and pay it directly to the U.S. Internal Revenue Service and to the respective states Department of Revenue.  

 

This withholding acts as a prepayment of tax they will owe at the end of the year, as well as a direct payment of certain other taxes.

 

Withholding payroll taxes is a complicated task.  The best way to approach this task is to use a payroll software or service.

W-4

IRS Form W-4
Have each new employee complete IRS form W-4. You will use this form to calculate the amount of federal income tax to withhold from the employee's wages. Most of the states have income tax structures that are based on the federal system, so you will use the W-4 to calculate the amount of state income tax to withhold as well.

Withholding Factors

The amount of a person's federal income tax withholding depends on several factors such as:

·   the taxpayer's marital status

·   the number of children or dependents the taxpayer has

·   whether or not he is an employee IRC 3401

·   if the taxpayer wants to claim child tax credits

·   if the taxpayer holds two or more jobs

·   if the taxpayer plans to itemize

·   any tax exemptions from withholding that the taxpayer wants to claim

·   any additional amount the taxpayer wants to withhold

Sample Federal Income Tax Calculation

Here is a sample Income tax calculation based on adjusted gross income of $40,000:

 

·   $40,000 (adjusted gross income)

·   $7,550 × 0.10 = $755

·   ($30,650 - $7,550) × 0.15 = $3,465

·   ($40,000 - $30,650) × 0.25 = $2,337.50

·   Total income tax = $6,557.50 (16.39% of income)
 

            See States Requirements

 

              Pay federal payroll taxes

 

                                                            Payroll Services

 

                                                                              Payroll software

Sample FICA Tax Calculation

Here is a sample FICA Tax calculation based on adjusted gross income of $40,000:

 

·   $40,000 (adjusted gross income)

·   $40,000 × 0.062 = $2,480 (Social Security portion)

·   $40,000 × 0.0145 = $580 (Medicare portion)

·   Total FICA tax = $3,060 (7.65% of income)

·   Total federal tax of individual = $9,617.50 (24.04% of income)

 

(an equal amount of FICA tax must be paid by the employer)

 

                                                     See States Requirements

 

                                                     Pay federal payroll taxes

 

                                       Payroll Services

 

                                                     Payroll software