When processing payroll, employers are responsible for withholding a portion of employees’ income to pay federal income taxes. To calculate tax withholding amount, employers determine the number of allowances employees claim on their IRS Form W-4 (Employee’s Withholding Allowance Certificate) and refer to the income tax withholding tables provided by the IRS in Publication 15 which give ranges based on pay frequency, filing status and withholding allowances. Generally, the more allowances claimed the lower the income tax.
There are two methods an employer can choose to determine how much federal tax should be withheld.
- Wage Bracket Method – Requires finding the range the employee’s wages fall under and using their claimed allowances to find the federal tax withholding amount.
- Percentage Method – Is a bit more complex. It requires multiplying the amount of one withholding tax by the number of allowances the employee claims, subtracting that from the employee’s wages and then finding the range for that number to calculate the tax amount.
For more on payroll taxes, check out this article.