Are you a business owner who needs to know how to calculate federal withholding taxes for your employees? If you can’t afford an accountant or one of those fany programs that calculate taxes for you, this article will provide more information on how to calculate federal withholding taxes.
To calculate federal withholding taxes, you will need:
- IRS Publication 15, also called the Employer’s Tax Guide
- Time sheets or some other proof of the hours your employees have worked
- Your employees’ W-4 forms
Once you’ve gathered the information you’ll need to calculate federal withholding taxes, you’ll need to figure out how often you want to pay your employees, and which method you want to use to calculate your employees’ taxes. After you’ve figured out those two things, you’ll be ready to use the information provided by the IRS to figure out your employees’ federal withholding taxes.
- Figure out how often you want to pay your employees. According to Publication 15, there are eight different classifications for how often employees can be paid: weekly, biweekly (every two weeks), semi-monthly (on certain days of the month, for example the first and fifteenth), monthly, quarterly (every three months), semi-annually, annually (once a year), and daily or miscellaneous, which you would use if you pay your employees daily or not on a regular schedule. Once you’ve determined how often you want to pay your employees, you need to decide which method you’re going to use to figure out the federal withholding taxes for your employees.
- Figure out which method you want to use to calculate your employees’ federal withholding taxes. Publication 15 provides two main methods that can be used to calculate payroll taxes. These are the wage bracket method and the percentage method. If you use the wage bracket method, you’ll need to follow the instructions on page 37 of Publication 15, and also refer to the tables on pages 41 to 60 of Publication 15. For example, let’s say you have an employee who is married, makes $500 on a weekly basis and claims two exemptions. Using the table on page 43 of Publication 15, you find that nine dollars in federal taxes need to be deducted for federal tax payments. Assuming that you don’t need to worry about anything else for this employee, such as pensions or advance EIC payments, you would stop here. Otherwise, you need to refer to the appropriate sections of Publication 15 for information on how to figure out how much more to deduct for these payments.
- If you choose to use the percentage method to calculate payroll taxes, you’ll need to follow the instructions on page 37 of Publication 15 under “Percentage Method.” Refer to the tables on pages 39 and 40. Using the example from above, the employee who is married, makes $500 on a weekly basis and claims two exemptions, you would figure out his federal income tax withholding by going through the following steps.
- According to the instructions on Page 37 of Publication 15, you would subtract 140.38 from 500 (70.19 for each of the two withholding allowances he’s claimed). This leaves you with an amount of $359.62. This is the total amount of his pay that’s subject to income tax withholding.
- Use table one on page 40 of Publication 15 to figure out the amount of income tax to withhold. You would need to subtract $8.40 plus 15% of the amount of his pay that’s over $200. In this case, that amount is $159.62. So $159.62 times 15% equals $23.94. When we add that to $8.40, the total amount of federal tax to be withheld is $32.34. Assuming that this employee has no other considerations that need to be taken into account, such as advance EIC payments or additional withholding for pensions, we would stop there. Otherwise, you need to refer to the appropriate sections of Publication 15 for more information.
As you can see, figuring out federal withholding can be confusing and requires a lot of calculation if you use the percentage method. Hopefully this article has simplified the instructions provided by Publication 15.