Federal Withholding
Employer Responsibility: What Businesses Need to Know

Federal Withholding

Federal withholding refers to the federal payroll taxes that are deducted from an employee’s salary and other compensation to provide for their tax liability. 

Any employer that pays employees is obligated by federal law to withhold payroll taxes from a paycheck. Examples of federal withholdings include income tax and Social Security and Medicare (Federal Insurance Contributions Act or FICA for short).

The federal payroll tax rate for income tax and FICA are determined by earnings over a pay period. This is typically for salaried employees but is more complex for hourly workers who are entitled to overtime pay. 

To calculate federal income tax and determine how much federal tax should be withheld, refer to the employee’s Form W-4 and reference IRS Publication 15 – Circular E. For determining which benefits are considered compensation (e.g., health insurance, education assistance, etc.), refer to IRS Publication 15B. The percentage of wages and cap on earnings for calculating FICA change annually. As of 2018, 6.2% of gross earnings (up to $128,400) goes to Social Security and 1.45% to Medicare. 

Employers are not required to withhold taxes from independent contractors’ wages. Instead, independent contractors are responsible for paying the applicable taxes directly to federal, state and local government agencies. Employers are not required to match their FICA or pay them unemployment, either.

Filing taxes can be an enormous burden for an organization. That’s why so many look for a partner with the expertise to handle complex tax filing accurately and efficiently. Going through the process alone can open your organization to compliance risk. Finding a partner to eliminate doubt and uncertainty is key to future success.

See how Paycor's payroll and tax software can help.


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