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An Employer’s Guide to Federal Income Tax Withholding

Employers have many employment tax responsibilities. Federal income tax withholding (FITW) is one of these responsibilities.

Withholding federal income tax can be a little confusing because you withhold a different amount from each employees’ wages, and employees can adjust the amount you need to withhold.

Keep reading to learn about FITW, how much to withhold, and how to deposit and remit the tax.

What is federal income tax?

You must withhold federal income tax from employee wages and give it to the federal government. The government then uses the tax to fund government programs, such as defense, health care, housing assistance, education, and veterans’ benefits.

How to calculate federal income tax withholding

Federal income tax withholding (FITW) is different for every employee. While you can learn how to calculate federal tax withholding by hand, using payroll software that calculates the tax for you is helpful.

To calculate FITW by hand, you need to use IRS Publication 15. In this publication, there are income tax withholding tables that will guide you through withholding.

There are two ways to calculate federal tax withholding: the wage bracket method and the percentage method. The two methods will give you similar results. Publication 15 has charts and information to help you with either method you choose.

Before you can calculate FITW, you need some information about the employee. You need to know the employee’s payment frequency, how much they earned during the pay period, how many allowances the employee claimed on Form W-4, and whether the employee is single or married. Once you have that information, simply follow the charts in Publication 15.

Let’s pretend you have an employee named Luke. You pay Luke a salary of $1,000 on a biweekly basis. Luke is single and claimed two allowances on his Form W-4.

For this example, let’s use the wage bracket method. Find the page in Publication 15 in the Wage Bracket section for single people paid on a biweekly basis. On the left side of the chart, find the correct wage range. Then, move across the page to the column with the correct amount of withholding allowances.

Federal income tax withholding table

For this example, you need to withhold $74 from Luke’s wages for federal income tax.

Form W-4

Form W-4 is the document employees use to claim their personal allowances.

Withholding allowances reduce the amount of federal income tax you withhold from an employee’s wages. The more allowances an employee claims, the less federal income tax you withhold. Employees can claim allowances for many things, such as dependents or a spouse.

Employees should fill out Form W-4 when they first begin working for you. They can also give you a new form to update their allowances at any time, especially if there is a family status change or other life event.

Exemption from withholding

Some employees are exempt from federal withholding. You will not withhold any federal income tax from the wages of an employee who is exempt from taxes.

An employee must indicate their exemption from withholding of Form W-4. If an employee writes “EXEMPT” on line 7 of the form, do not withhold federal income tax from their wages.

Depositing federal income tax

The federal income tax withheld from employee wages must be deposited on a regular schedule. Do not keep the taxes or use them for other purposes. Keeping or using the money is illegal, and you could be subject to civil and criminal sanctions.

There are two deposit schedules that you might use: monthly or semi-weekly. You do not get to choose your deposit schedule. Before the beginning of each calendar year, use the instructions in Publication 15 to determine how often you need to deposit the federal income tax. Your deposit schedule is based on what you reported on Form 941 during a specified lookback period.

When you deposit FITW, you will also deposit FICA taxes.

You must make deposits electronically using the Electronic Federal Tax Payment System (EFTPS). If you don’t make your deposits on time, you may have to pay a penalty.

Reporting federal income tax

You need to report how much federal income tax you deposit. To do this, fill out and submit Form 941 on a quarterly basis.

The form is due by the last day of the month following the end of the quarter.

  • For the first quarter, the form is due by April 30
  • For the second quarter, the form is due by July 31
  • For the third quarter, the form is due by October 31
  • For the fourth quarter, the form is due by January 31

You can report your deposits annually on Form 944 only if you receive written notification from the IRS. This form is due by January 31.

Federal income tax errors

If you make a mistake when withholding federal income tax, you can make a correction using Form 941-X (or Form 944-X if you use Form 944). If you withheld and remitted too much tax, you can use the form to make an adjustment or to claim a refund. If you did not remit enough tax, you can fill out the form and submit a payment for the owed amount.

You don’t have to calculate FITW yourself. Patriot Software’s Full Service Payroll software will do all the calculations for you. Then, we’ll deposit and file the taxes. With our payroll services, you don’t need to worry about these taxes, which means you have more time to spend on your business. Start your free trial today!

This article was updated from its original publication date of 4/2/2012.

This is not intended as legal advice; for more information, please click here.

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