Employers are required to withhold federal, and in most cases, state taxes from employees’ wages. Federal taxes include federal income tax and Social Security and Medicare (FICA) taxes. If state income taxes apply, the employee must also pay this tax. Federal income tax and state income tax amounts depend on the employee’s withholding claims and the governments' tax tables. The latter includes a percentage method. FICA taxes are also based on a specific percentage.
Use the IRS Circular E percentage method to figure federal income tax withholding. You may use the wage bracket method if you have fewer than 10 allowances and your wages are within the wage bracket limit, but you can use the percentage method in any circumstance. The percentage method gives you the percentage amount relevant to your taxable wages. For instance, say you earn $640 biweekly and claim single/one withholding allowance. Go to page 37 of the 2010 Circular E:
Calculation: $640 – $140.38 (the amount for one withhold allowance) = $499.62. Go to the tax table on page 39. Look up $499.62; it falls in the range between $401 and $1,387. Excess over $401 is $98.62 + 15 percent = $14.79 + $16.80 = $31.59, your biweekly federal income tax withholding.
Calculate Social Security tax at 6.2 percent of all wages, up to the annual maximum of $106,800. For instance, say you earn $500 weekly:
Calculation: $500 x 6.2 percent = $31, weekly Social Security withholding tax.
Once you have earned $106,800 for the year, your Social Security withholding tax should cease. Your employer should resume it at the start of the next year.
Figure Medicare tax at 1.45 percent of your gross wages. For instance, say you earn $3,000 monthly:
Calculation: $3,000 x 1.45 percent = $43.50, monthly Medicare withholding tax.
Medicare tax has no wage limit.
Use your filing status, number of allowances, and the state tax withholding tables specific to your state to perform the calculation for state income taxes, similar to the calculation for federal taxes. Each state sets its own income tax rate. Furthermore, some states such as Florida, Alaska, South Dakota and Texas do not charge state income tax.
Ask your employer for a copy of the Circular E or download it from the IRS website. The Circular E and the Social Security Administration's website both state the FICA tax percentages.
- IRS: 2010 Circular E
- Social Security Administration: Social Security & Medicare Tax Rates
- IRS: States without a State Income Tax
- Taxpayer Advocate Service, "Vol. 2, TAS Research and Related Studies: A Conceptual Analysis of Pay-As-You-Earn (PAYE) Withholding Systems as a Mechanism for Simplifying and Improving U.S. Tax Administration," Page 11. Accessed April 1, 2020.
- Internal Revenue Service. "Understanding Taxes -- Theme 2: Taxes in U.S. History." Accessed April 1, 2020.
- Internal Revenue Service. "Form W-4," Accessed April 1, 2020.
- Tax Foundation. "State Individual Income Tax Rates and Brackets," Pages 1–10. Accessed April 1, 2020.
- Social Security Administration. "Contribution And Benefit Base," Accessed April 1, 2020.
- U.S. Congress. "H.R. 748 - CARES Act." Accessed April 1, 2020.
- Ask your employer for a copy of the Circular E or download it from the IRS website. The Circular E and the Social Security Administration's website both state the FICA tax percentages.
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.