The federal taxes your employer must withhold from your paychecks are regulated by the Internal Revenue Service and Social Security Administration. These taxes comprise federal income tax, which the IRS administers, and Social Security tax and Medicare tax, which the Social Security Administration oversees. The amount that should be withheld varies by tax. Because withholding is based on taxable wages, you must first determine your taxable wages and then figure the withholding amount.
Figuring Taxable Wages
Your pay after the subtraction of pretax deductions and nontaxable wages is called your taxable wages. Pretax deductions include medical, dental, vision, dependent care, adoption assistance, group life insurance, health savings accounts and 401(k) contributions. Nontaxable wages pertain to qualified mileage and expense reimbursements. While some pretax deductions are subject to certain federal taxes, others are not. You may ask your human resources or payroll department which taxes apply to your pretax deductions. Subtract your pretax deductions and nontaxable wages from your gross income for the pay period to obtain your taxable wages.
Federal Income Tax Withholding
To figure federal income tax, use your Form W-4 and IRS Circular E, which can be found online. Federal income tax withholding is based on your filing status, taxable wages and number of allowances. You can find your filing status on line 3 of the withholding allowance certificate section of your W-4; your number of allowances is on line 5. Look for the Circular E withholding tax table that matches your filing status, taxable wages and number of allowances. For example, your taxable wages for the biweekly pay period are $900 and you claimed "Single" filing status with three allowances on your W-4. According to Page 52 of the 2015 Circular E, your withholding would be $36. If you meet the criteria for being exempt, as stated on line 7 of the W-4, no federal income tax should be withheld.
Social Security and Medicare Tax Deductions
You can find Social Security and Medicare withholding rates in Circular E or on the Social Security Administration website. For 2015, your employer withholds Social Security tax at 6.2 percent of your taxable wages, up to $118,000 for the year. Medicare tax is withheld at 1.45 percent; all of your annual taxable wages are subject to this tax. Your employer pays the same amount as you do for both of these taxes. An additional Medicare tax of 0.9 percent must come out of your wages that exceed $200,000. Only the employee pays this additional tax on the excess wages; the employer is excluded from it.
W-2 Reporting Considerations
Your employer is responsible for submitting and reporting your withholding to the respective government agency. It should also provide you with an annual W-2 detailing your federal, Social Security and Medicare gross taxable wages, which, respectively, go in boxes 1, 3 and 5. These gross taxable amounts are your earnings after pretax deductions and nontaxable wages. Your federal income tax, Social Security tax and Medicare tax, respectively, are reported in boxes 2, 4 and 6.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.