You’ve hired employees, and onboarded them properly. Now it’s time to pay them. But how?
There are several methods to determine how to withhold federal taxes from your employees’ paychecks properly. The most common are the wage bracket method and the percentage method - all based on what your employees enter on their W-4s.
Wage Bracket Method
First, find the proper table in IRS Publication 51
for your payroll period - the period of service for which you pay wages - and your employee’s marital status listed on his or her W-4. Holidays, and a new employee starting mid-week, can affect your payroll period. Find the proper amount to withhold by taking these and the number of withholding allowances on his or her W-4 and the amount of taxable wages.
If you cannot use the wage bracket method because your employee’s taxable wages exceed the amount shown in the last bracket of the tables in IRS Publication 51
, you must use the percentage method of withholding. Before using this option, reduce taxable wages by the number of total allowances. If the result ultimately exceeds the last bracket, you’ll know for sure the percentage method is needed.
The percentage method tables (page 46 of Publication 51
) contain formulas for single and married employees for weekly, bi-weekly, semi-monthly, monthly, daily or miscellaneous, quarterly, semi-annual, and annual payroll periods. This method works for any number of withholding allowances the employee claims, and any amount of taxable wages.
To figure out federal income tax, follow these steps:
- Multiply one withholding allowance (based on table in IRS Publication 51) by the number of allowances your employee claims. This number changes based on weekly, bi-weekly, semi-monthly, monthly, and other pay periods.
- Subtract the amount you were left with from your employee’s taxable wages.
- Determine the amount to withhold (based on marital status and other factors) in IRS Publication 51.
Here is an example: You pay your single employee $1,100 bi-weekly. She has two withholding allowances marked on her W-4. Based on the percentage method, the math would look something like this:
Total gross payment: $1,100.00.
Payroll period (bi-weekly) allowance: $159.60.
Allowances on W-4: Two.
Payroll period amount multiplied by allowance amount: $319.20
Amount subject to withholding ($319.20 subtracted from the total gross payment of $1,100.00): $780.80
Tax to withhold from $780.80 from marital status (single): $64.67**
**You can round numbers by reducing the last digit to zero or figuring the wages to the nearest dollar.
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, and type of equipment at your disposal may factor into your decision.