How to Calculate Federal Taxes on Wages
Federal taxes have been withheld from people's paychecks since the federal tax withholding system's implementation in 1943. The employer is required by the IRS to withhold a set amount of taxes from each employee's paycheck. The employer sends the amount withheld from each employee's wages to the IRS.
- Fill out Form W-4: This form should be filled out when you start a new job, have a change in the number of dependents that you wish to claim or a change in status. This form lets the employer know what amount of federal taxes to withhold from your paycheck. The employees fill out the form indicating their filing status, single or married and number of dependents being claimed. Failure to fill out the form does not mean that federal taxes will not be withheld; it means that taxes will be withheld at a higher single rate. Each dependent claimed reduces the amount of taxes withheld from each paycheck.
- Using IRS Withholding Tax Table: The employer uses the employee's W-4 and the IRS's withholding tax table. First, the employer must deduct any pretax deductions from the employee's gross wages, such as 401k contributions. From the table, the employer matches the employee's gross wages or amount before any withholding, filing status and number of allowances claimed.
- Percentage method to withhold taxes: Another method used by some employers is the percentage method. The IRS allows a certain amount to be deducted per allowance claimed to determine the employee's taxable wages. So, if the amount is $70.19 per week x 3 allowances (whatever number claimed by the employee) = $210.57. Then, $210.57 would be deducted from the employee's gross wages. Then the IRS percentage method table should be used to determine the amount to be withheld on the taxable wages.
- Calculating FICA withholdings: FICA taxes are the Medicare and Social Security taxes. Each one is paid equally by the employee and the employer. Social Security is 6.2% of an employee's gross wages, up to $106,800 per year. Medicare is 1.45% of an employee's gross wages.