Federal Tax Withholding: Wage Bracket Method v. Percentage Method

The most common methods for determining an employee's withholding from a paycheck are the wage bracket method and the percentage method, which are based on what your employees enter on their W-4 federal forms.

You’ve hired employees and onboarded them properly. Now it’s time to pay them. But how? As an employer or business owner, you will calculate the amount of tax to withhold based on the information from an employee’s Form W-4, their gross pay, payroll frequency, and IRS tax withholding tables found in IRS Publication 15-T. In addition to the federal tax withholding addressed in this article, don’t forget that you may need additional withholding for state and local taxes, FICA (social security), and Medicare taxes.

Starting with the employee’s tax forms, pay attention to whether or not they have the new Form W-4 introduced in 2020 or the older form from 2019 and before. The newer Form W-4 introduced in 2020 removed withholding allowances. The IRS says the newer form “replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.” The newer form asks the employee to enter information such as filing status, number of jobs held at one time, tax credits for dependents, and any additional amounts that must be withheld. Of course, you now need to use this new form with new hires and when an employee wants to update their form.

Once you have the W-4 information in hand, you will want to open the federal income tax withholding tables in IRS Publication 15-T. This publication includes:

• Wage bracket method tables for manual payroll systems for Forms W-4 from 2020 or later and separate tax tables for manual payroll systems for earlier forms (2019 and earlier).
• Percentage method tables for automated payroll systems.
• Percentage method tables for manual payroll systems for Forms W-4 from 2020 or later and separate tables for manual payroll systems for earlier forms (2019 and earlier).

There are alternative methods of withholding, but the wage bracket method and the percentage method are the most common ones. The one that is best for your organization depends on the situations of your employees as well as other factors, such as whether or not your payroll is automated or manual. Let’s take a look.

The Wage Bracket Method

The wage bracket method is the simplest method. However, you can’t use it if the employee makes over $100,000 or has over 10 allowances (if using a Form W-4 from before 2019).

1. Simply go to the correct wage bracket method table in IRS Publication 15-T and find the range that includes the employee’s taxable wage. Pay attention to other factors, such as marital status.
2. Then, you can see the amount to withhold based on the information on the employee's Form W-4.

Be sure you use the correct table depending on whether or not the Form W-4 is from 2020 or later vs. an earlier form.

Advantages of the Wage Bracket Method

• It’s the simplest, fastest method without additional calculations
• It’s good for employees with simple withholding needs

 Limitations of the Wage Bracket Method

• The wage bracket method may only be used for employees with income up to approximately $100,000 per year.
• It may not be used with Form W-4 from 2019 or older if the employee has claimed more than 10 allowances.
• It may result in different tax withholding amounts when compared to the percentage method due to its specific income thresholds and ranges. So, if you are using the wage bracket method for some employees and the percentage method for others who do not qualify for the wage bracket method, there may be some inconsistency.

The Percentage Method

Tables for the percentage method also contain ranges for employees’ wages. However, with the percentage method, you must add a percentage calculation to the flat dollar amount in the table.

1. From the appropriate table in IRS Publication 15-T, determine the employee’s range (between X and Y amounts). This will give you a flat dollar amount to withhold. You are not finished yet, though.
2. Now, to this flat amount, you must add a percentage of the amount that the adjusted wage exceeds. IRS Publication 15-T will give you different instructions about how to make this calculation depending on whether you are using an automated payroll system or a manual payroll system. The instructions will tell you how to do the necessary calculations, determine the employee’s wage amount, include tax credits, and come up with the final federal tax withholding amount.

As we have already seen, there are three different sections for the percentage payroll method: Automated payroll systems, manual payroll systems for Forms W-4 from 2020 or later, and manual systems for Forms W-4 2019 and earlier. 

Advantages of the Percentage Method

• You can use the percentage method for all incomes, whether above or below $100,000. This enables consistency with how you withhold for all employees.
• You can use the percentage method regardless of the number of allowances (if using a 2019 or earlier W-4).
• Automated payroll compliance systems use the percentage method because it is not constrained by income level or number of allowances.
• The percentage method enables employers to calculate federal income tax withholding based on graduated federal tax rates.
• You can also use the percentage method for withholding not just on regular wages but also for periodic payments or supplemental wages, such as when an employee receives irregular payments such as bonuses or commissions.

Limitations of the Percentage Method

• The percentage method is more complicated than the wage bracket method because employers must make additional calculations.
• The percentage method is also more complex because it does not impose wage or allowance limits. This can be an advantage, but if you don’t need to use the percentage method, you may want to consider the wage bracket method.
• The percentage method can cause some differences in withholding amounts throughout the year. This can result in a more complicated process at the end of the year when you try to reconcile figures.
• When the tax code is revised as it often is, you need to be particularly careful to stay on top of updates to the rates and calculations. You can’t just check that you have the updated flat amount; you must also use the updated calculations.

The Importance of Updates No Matter What System You Use

Employers must pay attention to updates no matter what withholding system they use. Tax regulations change frequently, so employers must pay close attention to stay in compliance. For example, the 2025 income tax withholding tables had new withholding amounts to adjust for inflation, thus requiring regular updates to payroll practices. This frequent change is one of the reasons the IRS publishes a yearly federal tax withholding calculator to help people figure out their tax liabilities.

So, Should I Use the Wage Bracket or the Percentage Method?

Just to boil it down:

• The wage bracket method is very easy and straightforward. It involves consulting tables and noting the employee’s marital status and number of allowances.
• However, if the employee makes more than about $100,000 in annual wages or has over 10 allowances, you must use another method, typically the percentage method.
• The percentage method requires calculating the withholding based on graduated federal tax rates and is more flexible than the wage bracket tables found in IRS publications.
• If you want to use automated payroll, you will need to use the percentage method rather than the wage bracket method.

You may use whichever withholding method is best suited to your particular payroll situation. The number of employees at your business, the payroll system you use, the taxable income of your employees, payroll frequency, and the type of equipment and software at your disposal may factor into your decision.