The U.S. government’s tax withholding system requires employers to withhold the certain payroll taxes from employee’s paychecks. Some taxes are subject to a flat percentage; others are determined by various factors, which depend on the employee’s personal and financial situation. Consequently, the amount of taxes an employee pays tends to vary.
The federal government requires employers to perform federal income tax, Social Security tax, and Medicare tax withholding. Most state governments require state income tax withholding, but the following do not: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming and Washington. A few state governments require disability insurance withholding, some cities require city income tax withholding and some local governments require local income tax withholding.
The employer uses the employee’s filing status, allowances, pay period and gross income to determine federal income tax withholding. The employer can obtain the employee’s filing status and allowances from lines 3 and 5, respectively on her W-4 form. It obtains the withholding amount from the IRS Circular E withholding tax table that matches the employee filing status, allowances, pay period and wages. Suppose the employee is married with zero allowances and earns $710 weekly. According to page 43 of the 2010 Circular E, her federal income tax payment is $57.
The employer calculates Medicare tax at 1.45 percent of all gross income. It computes Social Security tax at 6.2 percent of gross income, up to the annual income limit of $106,800.
State income tax withholding depends on the state revenue agency’s guidelines. Some states require the employer to use the state withholding tax tables and the employee’s state withholding tax form to figure the withholding – this system is comparable to federal income tax withholding. Others may require the employer to use the employee’s W-4 form, or a flat withholding percentage, for state income tax withholding purposes. Local and city income tax withholding vary as well. The state revenue agency generally has the instructions for these withholding. To determine an Ohio employee’s school district tax withholding, for example, the employer uses the school district withholding tax tables and his state income tax withholding form (also used to determine state income tax withholding). The state usually limits the amount an employer can withhold for disability insurance. In California, for example, the tax rate is 1.1 percent of taxable wages, up to $93,316 for the year.
The employer pays federal income tax, Social Security tax and Medicare tax withholding to the Internal Revenue Service. It pays state, city and local payroll tax withholding according to its revenue agency’s policies. Both the IRS and the state revenue agency requires the employer to file tax returns showing tax withholding for the reporting period.
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.