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How to Figure Income Tax Withholding

1.

Figure federal income tax based on the employee's allowances and filing status and IRS Circular E's withholding tax tables. Ensure that you use the Circular E relevant to the tax year you are figuring. Locate the allowances and filing status on Lines 3 and 5, respectively, on the employee's W-4 form. The IRS allows taxpayers to claim allowances, such as the employee and her spouse and dependents. Allowances lower the amount of wages subjected to federal income tax.



Don't withhold federal income tax if the employee claims "exempt" on his W-4. If he gives you an invalid W-4, such as claiming exempt and entering an allowance amount on Line 5, return the W-4 to the employee and request a valid one. If the employee fails to submit a valid W-4, withhold federal income tax at single with zero allowances. Once you determine the employee's filing status and allowances, you must use the Circular E's tax tables to figure the withholding amount.

2.

Calculate Social Security and Medicare, also called FICA taxes, at 6.2 percent and 1.45 percent of gross earnings, respectively. Do not withhold any more Social Security for the year, once the employee meets the yearly wage base of $106,800.

3.

Calculate state income tax as per your state's requirements. This process is comparable to federal income tax withholding, except you must use your state's withholding tax tables and the employee's state withholding allowance certificate. States, such as Alaska, Nevada, Florida, New Hampshire, Texas, South Dakota, Washington, Tennessee and Wyoming do not impose state income tax. The state of New York have both state and city income tax and the state of Ohio charges both state and local income tax. The state revenue (taxation) website typically lists the withholding rates for each applicable tax. As with Form W-4, if the employee claims "exempt" on her state withholding allowance certificate, do not withhold the tax.

Tips and Warnings

  • If the employee appears to be claiming an exorbitant amount of allowances on his W-4, such as 10 or more, make the withholding accordingly. If the employee is underpaying federal income tax, the IRS will address the employee on the matter. Additionally, the IRS can charge the employee a $500 penalty for submitting a false W-4.
  • Advise your employees to use the IRS withholding calculator or consult Publication 919 to avoid too little or excess federal income tax withheld from their paychecks.


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