How to Calculate Federal Income Tax
IRS INCOME TAX CALCULATOR
The IRS has an “Income Tax Withholding Assistant” calculator on their website that employers can use to calculate FIT. If you have a question about how federal income tax is calculated on a particular paycheck, you can use this calculator to enter the variables and compare the IRS calculator to an actual check.
*Note the calculator is downloadable as an Excel spreadsheet from the IRS website. If you only have Google Sheets, the calculator may not work properly and you may get a formula error.
HOW PATRIOT CALCULATES FEDERAL INCOME TAX
There are two possible methods that employers and payroll companies can use to calculate FIT:
- Percentage method
- Wage bracket method
If you are curious how the calculations are determined, follow along to learn how the software calculates federal income taxes.
Patriot uses the PERCENTAGE method for automated payroll systems. You can find the percentage method tax tables in IRS Publication 15-T.
- Page 5 has a worksheet to calculate the taxable wages.
- Page 6 contains the tax tables. We’ll explain how these work soon, but note six separate tables are used, depending on the following variables:
- The employee’s tax filing status indicated on their Form W-4 (married filing jointly, single or married filing separately, or head of household).
- Whether the employee checked the box for two jobs in Step 2 of their new W-4 form (note the three tables in the right column are only used if they have checked the box in Step 2). If they used the 2019 or older W-4 form or if the new W-4 form box is unchecked, use the three tables on the left.
- Also, notice in the table that if the employee’s wages are low enough, no federal income tax will be
Now, let’s look at some examples of how to figure out federal income tax withholding. This will require some math, so grab a pencil and your thinking cap!
Let’s say we have an employee with the following:
- Paid biweekly
- No other pre-tax deductions (e.g., 401(k) or health insurance)
- Using new Form W-4
- No other jobs (didn’t mark the box in Step 2 of the W-4)
- No dependents (nothing in Step 3 of W-4)
- No other adjustments (nothing in Step 4 of W-4)
Here is what the employee’s paper W-4 looks like:
The employee’s first paycheck is $3,000, which is taxable.
What will the employee’s FIT withholding be? Here’s what we’ll need to do:
- Calculate the adjusted wages. First, use the worksheet found on page 5 of IRS Pub 15-T to calculate the adjusted annual wage amount.
- Figure the tentative tax to withhold. Once you have the adjusted annual wages, you can use the tax table found on page 6 of IRS Pub 15-T and calculate the annual federal income tax amount.
- Account for dependent tax credits. Finally, you can make any needed tax adjustments for dependents and determine the amount of tax per check.
Step 1: Figure the Adjusted Wages
To get the adjusted annual wage amount, let’s look at this worksheet. It can be daunting (gotta love IRS tax forms), but we’ll break down each step. Note there’s a different process depending on if the employee has a new W-4 (2020 and later) or an old W-4 (2019 and earlier). It may help to have a copy of the new W-4 open in another window so you can refer to the form as we go down the worksheet.
Remember to use the Percentage Method Tables for Automated Payroll Systems if you are trying to verify Patriot’s FIT calculations.
- The biweekly wages are $3,000 (Line 1a)
- Multiply $3,000 by 26 pays for biweekly (Line 1b) to get the annual wages of $78,000 (Line 1c)
- If the employee had an amount on Step 4a of the new W-4 with other income (Line 1d), add these two numbers together to increase their annual wages (Line 1e)
- If the employee had an amount on Step 4b of the new W-4 with deductions (Line 1f), this would reduce their annual wages.
- If the employee checked the box in Step 2 of the new W-4 for multiple jobs, enter 0. Otherwise, since the employee is single, we’ll enter $8,600. This will reduce the employee’s annual wages (Line 1g).
- Get the total amount to reduce from the original annual amount (Line 1h). In this case, it’s $0 + $8,600 since there are no other deductions.
- Now that we know how much to reduce, take $78,000 – $8,600 = $69,400 (Line 1i)
- $69,400 is the adjusted annual wage amount that you’ll look up in the tax table.
- Note the old W-4 is a simpler calculation. You’ll skip lines 1d through 1i and instead jump down to line 1j, take the number of allowances multiplied by $4,300, and deduct that amount from the annual wages.
Summary for New W-4 (2020 and later)
Annual amount + Other Income – Deductions – the Step 2 variable* = adjusted annual wage amount
- If Step 2 box is checked, no further deductions.
- If Step 2 box is unchecked and married filing jointly, deduct $12,900.
- If Step 2 box is unchecked and any other filing status, deduct $8,600.
Summary for Old W-4 (before 2020)
Annual amount – ($4,300 x number of allowances) = adjusted annual wage amount
So now that we know our adjusted annual wage, let’s look at the tax table and calculate the preliminary tax to be withheld.
STEP 2: FIGURE THE TAX WITHHOLDING AMOUNT
To recap from the previous page, the adjusted annual wages are $69,400.
Let’s look at the tax table found on page 6 of IRS Pub 15-T.
Note there are actually six different tables on this page. The one you use depends on the employee’s filing status, the version of the W-4 they are using, and whether they have checked the multiple jobs box in Step 2 of their new W-4 (everything in the right column). Since our example is using the new W-4 and has the Step 2 box unchecked, we’re going to use the middle table in the left column.
- Looking in the Single or Married Filing Separately table, the employee’s taxable wages of $69,400 fall between the range of $44,475 (Column A) to $90,325 (Column B). See the highlighted row above.
- We can see in Column C, at least $4,664 in FIT needs withheld for the year. The $4,664 is a total of the following:
- 10% on wages between $3,950 and $13,900
- 12% on wages between $13,900 and $44,475
- In addition, you need to calculate 22% (Column D) of the earnings that are over $44,475 (Column E).
- $69,400 wages – $44,475 = $24,925 in wages taxed at 22%. This is $5,483.50 in FIT.
- If we add up the two tax amounts: $4,664 + $5,483.50 = $10,147.50 total FIT to be withheld from all checks this year.
- We’ll take the annual FIT amount and divide back down by 26 to get the FIT amount per check. $10,147.50 / 26 = $390.29.
Here is what the worksheet would look like:
STEP 3: DEPENDENTS
If an employee marked that they have dependents on their new W-4, there is another step to calculate the tax credit they can take. Instead of reducing taxable wages like deductions, dependents reduce the actual tax owed. This is considered a tax credit.
- Deductions reduce taxable wages
- Dependents reduce actual FIT (tax credit)
In our previous example, our employee had no dependents, so our FIT calculation of $390.39 for that paycheck is accurate.
But let’s say the employee had two dependent children. Per the new W-4 form, the employee would multiply $2,000 by the two kids to get $4,000.
Back in the worksheet on line 3a, enter the amount in Step 3 of the W-4, and divide by the number of pay periods.
$4000 / 26 = $153.85
The employee’s FIT amount per paycheck of $390.39 reduces by $153.85 for a new lower FIT of $236.44 per pay.
STEP 4: ADDITIONAL FIT WITHHOLDING
The last step in manually calculating FIT is to add any additional withholding to the FIT per pay amount.
- If an employee is using the new W-4, they would indicate this in Step 4c.
- If the employee is using the old W-4, they would indicate this in Line 6.
This amount is already in terms of each pay period, so there’s no need to divide by the number of pay periods.
The extra withholding amount is simply added to the FIT per pay amount.
So for example, if Martha’s FIT per pay is $236.44 and she wants an additional $20 per pay withheld, her FIT per pay would be $256.44.
LOW WAGE EXAMPLE: ADJUSTED ANNUAL WAGE
Let’s take a look at another example. This time around, the employee has the following:
- New W-4
- Married filing jointly
- No other jobs
- No dependents
- No other adjustments
- Paid biweekly
The employee’s taxable wages for their biweekly paycheck are lower than the previous example, $800. Use the same worksheet process as before to figure the adjusted annual wage.
The adjusted annual wage amount is $7,900 since they did not check the Step 2 box and the employee is married filing jointly which reduces the wages by $12,900. Next, use the table to find the FIT.
LOW WAGE EXAMPLE: NO FEDERAL TAX DEDUCTED
With an adjusted annual wage of $12,200, let’s find this in the table. In this example, the employee is married filing jointly.
Because the taxable wages of $7,900 fall between the range of $0 and $12,200 in the tax table, this employee does not owe federal tax on this check. Column C in the table is $0.00. Column D is 0% and Column E is $0.
What’s the big takeaway from the previous example? It’s very possible that an employee may not have enough in taxable earnings to have FIT deducted. The first thing to do is look at the employee’s earnings for that paycheck.
As a general rule, if the employee earns about $20,000 or less in a year with no other adjustments needed, they will not pay FIT.
As we have seen, the process of calculating employee FIT withholding is not exactly simple! Let’s recap the important points:
- Patriot uses the percentage method in our software to calculate FIT
- Employees may not have FIT withheld if they do not make a certain amount
- There are two versions of the W-4 form that an employee may have completed
- How the employee completes the form determines exactly how much FIT is withheld
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