Withholding federal income tax from employee wages is a necessary, but tricky, part of running payroll. There is no standard amount you withhold from employee wages for federal income taxes. Instead, tax amounts are determined by factors like pay, Form W-4 withholding information, and filing status.
You need to have each employee’s tax filing status so you can determine the correct amount to withhold. Learn about the different tax filing status options and how filing status can affect the amount you withhold for federal income tax.
What is filing status?
An individual’s taxes are based on their filing status. Filing status is sometimes synonymous with marital status, as it can indicate whether someone is married or unmarried. There are five IRS filing status options, which are single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.
If an individual is unmarried and doesn’t meet any of the other filing status guidelines, they are single. People who are widowed before the first of the year without getting remarried before the end of the year might also be considered single, unless they meet different filing status requirements.
Married filing jointly
Married individuals can choose whether they want to file together or separately to give themselves a better tax savings. They can claim this filing status as long as they are married before the end of the year. Both an individual and their spouse must agree that they are using this filing status. If a spouse dies during the year, an individual can still use this filing status.
Married filing separately
Couples who are married but choose to file separately can use this filing status. An employee might elect this filing status if they can get a better tax benefit.
Head of household
Individuals can use head of household status if they are unmarried on the last day of the year, paid more than half the cost of maintaining a home, and had a qualifying person (e.g., dependent) live in the home for more than half of the year.
Qualifying widow(er) with dependent child
An individual can use this filing status for two years following the year their spouse died. It lets someone use joint return tax rates without filing a joint return. The individual can use this option if they were able to file a joint return during the year their spouse died, they didn’t remarry, they have a dependent child living in the house all year, and they paid more than half the cost of maintaining the home.
For information on filing status options, exemptions, deductions, and more, consult IRS Publication 501.
How does an employee’s IRS tax filing status affect payroll deductions?
When you hire a new employee, they must fill out new employee forms like Form W-4, Employee’s Withholding Certificate. You use Form W-4 to determine how much money to withhold from each employee’s payroll. If the employee has a family status change (e.g., divorce) while working at your business, they must update Form W-4.
On Form W-4, employees enter their personal information, their filing status, and tax withholding deductions. In some rare cases, employees might be tax exempt.
To indicate their federal filing status, employees must check one of three boxes in box 3:
- Single (also for head of household)
- Married, but withhold at higher Single rate
If an employee marks that they are married instead of single, they may have less withheld from their wages.
The IRS provides income tax withholding tables in Publication 15. You can use either the wage bracket or percentage method provided. Use these tables to determine withholding amounts by filing status, wage, and Form W-4 tax withholding information.
Without knowing an employee’s filing status, you will run payroll and withhold taxes incorrectly. This could open the door to penalties. Keep accurate records, and make sure employees update you if their filing status changes.
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This article has been updated from its original publish date of February 24, 2012.
This is not intended as legal advice; for more information, please click here.