As an employer, you have many responsibilities when it comes to employment taxes. You must subtract taxes from employee wages, contribute to some, and completely pay others.
As you’re handling employment taxes, you will come across the term “withholding” in relation to federal income tax. What is withholding from federal income taxes?
What is withholding?
Withholding is the act of removing federal income tax from employee wages. You give the federal income tax withholding (FITW) to the federal government. The government then uses the money to fund federal programs.
Remove federal tax withholding from each employee’s paycheck. You must deposit the money on either a monthly or semi-weekly basis. You do not get to choose when you can deposit the withheld tax. Before the beginning of each year, you need to determine your deposit schedule. Use Publication 15 to help you determine your schedule. You should review your deposit schedule every year because it can change.
You will deposit the federal withholding using the Electronic Federal Tax Payment System. Deposit Social Security and Medicare taxes at the same time as your FITW deposit.
You must report the tax withholding on Form 941. This is a form you must file on a quarterly basis.
How to determine the withholding amount
To determine how much federal income tax to withhold, you need a Form W-4 from each employee. On Form W-4, employees will claim withholding allowances. Employees can claim allowances for multiple reasons, including a spouse and children. There is no maximum number of allowances that an employee can claim. The allowances help you determine how much federal income tax to withhold from each employee’s wages.
In addition to Form W-4, you need to use the tax withholding tables found in Publication 15. You need to calculate each employee’s withholding amount individually. The amount you withhold depends on the pay frequency, the number of allowances, and whether the employee is single or married.
Exemption from withholding
Some employees can be exempt from federal withholding. You will not withhold federal income tax from the wages of tax-exempt employees.
An employee can be exempt from FITW if:
- The employee has the right to a full refund of federal income tax withheld in the previous year because they had no tax liability.
- The employee expects a full refund of federal income tax withheld for the current year because they plan to have no tax liability.
If an employee needs help deciding if they are tax exempt, have them use Publication 505.
An employee must write “exempt” on their Form W-4 to tell you that they are exempt from FITW. If an employee does not claim exempt on this form, you must begin withholding tax.
Employees who are exempt from withholding must give you a new Form W-4 every year by February 15 to keep their exemption.
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This article is updated from its original publication date of 12/17/2011.