Like past years, the IRS released changes to the income tax withholding tables for 2021. Use these updated tables to calculate federal income tax on employee wages in 2021. In addition to the annual tax rate and bracket changes, there is also a new, optional computational bridge.
Confused? Staying on top of changing employment tax rates can be a confusing, but necessary, employer task. Rates impact the amount of money you withhold from employee wages.
If you aren’t familiar with the 2021 income tax withholding tables and the changes to the income tax withholding process, say no more. We’ve got the scoop on how withholding tables work and the changes to the federal withholding tables.
What are income tax withholding tables?
Federal withholding tables determine how much money employers should withhold from employee wages for federal income tax (FIT). Use an employee’s Form W-4 information, filing status, and pay frequency to figure out FIT withholding.
New hires must fill out Form W-4, Employee’s Withholding Certificate, when they start working at your business. The IRS designed a new W-4 form that removed withholding allowances beginning in 2020. This updated version of Form W-4 lets employees enter personal information, declare multiple jobs or a working spouse, claim dependents, and make other adjustments.
Once you have an employee’s Form W-4 information, refer to the income tax withholding tables in IRS Publication 15-T. These tables provide federal income tax ranges based on pay frequency, filing status, and how the employee fills out Form W-4.
There are two main methods for determining an employee’s federal income tax withholding:
- Wage bracket method
- Percentage method
To use these income tax withholding tables that correspond with the new Form W-4, find the employee’s adjusted wage amount. You can do this by using the worksheet that the IRS provides in Publication 15-T.
Wage bracket method
If you use the wage bracket method, find the range the employee’s wages fall under (i.e., “At least X, But less than X”)
Then, using the information the employee entered on Form W-4 (e.g., standard withholding or withholding based on adjustments), find the amount to withhold.
IRS Publication 15-T has two wage bracket method sections. The one you used is based on the version of Form W-4 you have on file for the employee:
- Manual payroll systems (2020 and later Forms W-4)
- Manual payroll systems (2019 and earlier Forms W-4)
Keep in mind that the wage bracket method tables only give tax rates for employees who earn up to around $100,000 annually. If you’re using a 2019 or earlier Form W-4 and the employee claimed more than 10 allowances, you also cannot use the wage bracket method.
The percentage method is a little different. Like the wage bracket method, there is a range that an employee’s wages can fall under. But unlike the wage bracket method, there is both a flat dollar amount as well as a percentage calculation to add together.
So, how exactly does this work? There are two steps to using the percentage method:
- Find the employee’s range (i.e., “At least X, But less than X”) to get the tentative amount to withhold
- Add a percentage of the amount that the Adjusted Wage exceeds to Step 1
There are three sections in IRS Publication 15-T for the percentage method:
- Automated payroll systems
- Manual payroll systems (2020 and later Forms W-4)
- Manual payroll systems (2019 and earlier Forms W-4)
The percentage method works in all situations, regardless of wages or allowances (if using a 2019 or earlier W-4). Automated payroll systems use the percentage method.
2021 income tax withholding tables
The Tax Cuts and Jobs Act of 2017 brought about a number of changes in tax rates and brackets, a drastic increase in the standard deduction, the elimination of personal exemptions, and a new W-4 form.
Between 2020 and 2021, many of these changes remain the same. The following are aspects of federal income tax withholding that are unchanged in 2021:
- No withholding allowances on 2020 and later Forms W-4
- Supplemental tax rate: 22%
- Backup withholding rate: 24%
- No personal exemption
Recap alert! Form W-4 changes: Again, the removal of withholding allowances is due to the redesigned IRS Form W-4. In the past, employees could claim more allowances to lower their FIT withholding. But for 2020 Forms W-4 and later, employees can lower their tax withholding by claiming dependents or using the deductions worksheet on the form. You must use this updated Form W-4 for all new hires.
Although the sweeping changes to the income tax withholding tables has generally started to stagnate, there are a few updates for 2021. As always, adjust your payroll tax withholding to reflect the 2021 changes to income tax withholding tables. If you use online payroll software, the information automatically updates.
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Here’s a rundown of 2021 updates:
- Federal withholding tax table changes
- Optional computational bridge
- Standard deduction increase
The IRS also updated their federal tax calculator for withholding in 2021. Individuals can use this tax calculator to determine their tax liabilities.
Federal income tax table changes: Rate and bracket updates
The federal income tax table brackets change annually. And due to the 2020 changes surrounding the repeal of withholding allowances and the redesign of Form W-4, you might still have questions about which table to reference.
Like last year, the federal withholding tax table you use depends on which version of Form W-4 an employee filled out and whether you automate payroll or do it manually.
Here’s a rundown of all of the federal income tax withholding methods available for determining an employee’s federal income tax withholding (unchanged from 2020):
- Percentage method tables for automated payroll systems
- Wage bracket method tables for manual payroll systems with Forms W-4 from 2020 or later
- Wage bracket method tables for manual payroll systems with Forms W-4 from 2019 or earlier
- Percentage method tables for manual payroll systems with Forms W-4 from 2020 or later
- Percentage method tables for manual payroll systems with Forms W-4 from 2019 or earlier
There are also two additional methods the IRS offers:
- Alternative methods for figuring withholding
- Tables for withholding on distributions of Indian gaming profits to tribal members
You can view all of the income tax withholding table methods in IRS Publication 15-T.
|Which income tax withholding method should you use?|
|Forms W-4 from 2019 or earlier:|
1. Wage bracket method tables for manual payroll systems with Forms W-4 from 2019 or earlier
2. Percentage method tables for manual payroll systems with Forms W-4 from 2019 or earlier
Forms W-4 from 2020 or later AND manual payroll:
1. Wage bracket method tables for manual payroll systems with Forms W-4 from 2020 or later
2. Percentage method tables for manual payroll systems with Forms W-4 from 2020 or later
Forms W-4 from 2020 or later AND automated payroll system:
1. Percentage method tables for automated payroll systems
If you’re using the IRS withholding tables for forms from 2020 and later, there is a “Standard withholding” and a “Form W-4, Step 2, Checkbox withholding” amount in place of the withholding allowances.
So, what are the 2021 changes? The IRS adjusts income thresholds annually for inflation. That means the federal income tax withholding table ranges and tax rates vary year by year. And, tax brackets (which taxpayers can use to determine their income taxes) also change annually.
For example, take a look at the 2021 federal income tax brackets for a single filer:
|Tax Rate||Taxable Income Range||Taxation|
|10%||$0 – $9,950||10% of the taxable income|
|12%||$9,951 – $40,525||$995 plus 12% of the amount over $9,950|
|22%||$40,526 – $86,375||$4,664 plus 22% of the amount over $40,525|
|24%||$86,376 – $164,925||$14,751 plus 24% of the amount over $86,375|
|32%||$164,926 – $209,425||$33,603 plus 32% of the amount over $164,925|
|35%||$209,426 – $523,600||$47,843 plus 35% of the amount over $209,425|
|37%||$523,601+||$157,804.25 plus 37% of the amount over $523,600|
You may notice that these tax bracket tax rates correspond to the percentage method tables percentages.
For more information on 2021 federal income tax brackets, along with 2021 tax bracket changes for other filing statuses, check out IRS 2020-45.
Optional computational bridge
If you’re wondering what in the world an optional computational bridge is, you’re not alone. The computational bridge has to do with “converting” 2019 and earlier Forms W-4 into 2020 and later Forms W-4.
Of course, it’s not entirely a conversion process. But, the computational bridge does help you treat 2019 and earlier forms like 2020 and later forms for income tax withholding.
This new 2021 feature is completely optional.
If you decide you want to treat all Forms W-4 like the 2020 and later versions for consistency, get out the employee’s 2019 and earlier Form W-4. Also, refer to a 2020 and later Form W-4 for the “conversion.”
Next, here are the adjustments you must make to use the computational bridge:
- Choose a filing status in Step 1(c) (2020 and later Form W-4) that reflects the employee’s marital status checked on Line 3 (2019 and earlier Form W-4)
- If the employee checked “Single” or “Married, but withhold at higher single rate” on the 2019 and earlier Form W-4, treat them as “Single” or “Married filing separately” on a 2020 or later Form W-4
- If the employee checked “Married” on the 2019 and earlier Form W-4, treat them as “Married filing jointly” on a 2020 or later Form W-4
- Enter an amount in Step 4(a) (2020 and later Form W-4) based on the applicable filing status you selected:
- $8,600: “Single” or “Married filing separately”
- $12,900: “Married filing jointly”
- Multiply withholding allowances claimed on Line 5 (2019 and earlier Form W-4) by $4,300. Enter the total into Step 4(b) (2020 and later Form W-4)
- Enter any additional withholding amounts requested on Line 6 (2019 and earlier Form W-4) into Step 4(c) (2020 and later Form W-4)
Standard deduction increase
Curious about the 2021 standard deduction rate? Take a look at the table below to get the standard deduction, for each filing status, from years 2017-2021.
|Filing Status||Standard Deduction (2021)||Standard Deduction (2020)||Standard Deduction (2019)||Standard Deduction (2018)||Standard Deduction (2017)|
|Married Filing Jointly||$25,100||$24,800||$24,400||$24,000||$12,700|
|Married Filing Separately||$12,550||$12,400||$12,200||$12,000||$6,350|
|Head of Household||$18,800||$18,650||$18,350||$18,000||$9,350|
How to use a withholding tax table: Example
Let’s say you have a single employee who earns $2,020 biweekly. They filled out the new 2020 Form W-4.
The employee has a relatively simple tax situation. When they filled out Form W-4, they wrote that they did not have another job or a working spouse. And, they did not claim dependents. They did not request any extra withholding.
Use the wage bracket method tables for manual payroll systems with Forms W-4 from 2020 or later to find out how much to withhold for federal income tax. This is Worksheet 2 in IRS Publication 15-T.
The worksheet is broken down into four steps:
- Adjust the employee’s wage amount
- Figure the tentative withholding amount
- Account for tax credits
- Figure the final amount to withhold
1. Adjust the employee’s wage amount
To use the new federal withholding tax table that corresponds with the new Form W-4, first find the employee’s adjusted wage amount. You can do this by completing Step 1 on Worksheet 2.
Because the employee’s tax situation is simple, you find that their adjusted wage amount is the same as their biweekly gross wages ($2,020).
2. Figure the tentative withholding amount
Now, use the 2021 income tax withholding tables to find which bracket $2,020 falls under for a single worker who is paid biweekly.
You find that this amount of $2,020 falls in the “At least $2,000, but less than $2,025” range.
Using the chart, you find that the “Standard withholding” for a single employee is $176. This is the tentative withholding amount to enter into Step 2.
3. Account for tax credits
Now, account for any dependents the employee claimed on Form W-4.
Because the employee didn’t claim any dependents, the employee’s tentative withholding amount is still $176.
4. Figure the final amount to withhold
Your last step for determining federal income tax withholding is to enter any additional amounts the employee requested withheld on Form W-4.
In this situation, the employee didn’t request extra withholding. So, the FIT amount to withhold from the employee’s wages each pay period is $176.
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This article has been updated from its original publication date of January 29, 2018.This is not intended as legal advice; for more information, please click here.