Methods of Withholding
The Internal Revenue Code allows employers to choose from several different methods for calculating the amount to withhold from an employee's wages for federal income tax. The most popular methods are the wage - bracket method and the percentage method.
Wage Bracket Method:
The simplest method for calculating federal income tax is the wage- bracket method. To calculate withholding you must know taxable wages, pay frequency, marital status and withholding allowances.
When the wage - bracket method is used, follow these steps:
- Find the proper wage- bracket table based on the employer's payroll period and the marital status claimed on the employee's form W- 4.
- Determine the employee's wages subject to federal income tax withholding by the employee's gross wages by any pre tax deductions.
- Locate the bracket that includes the employee's taxable
and the column with the number of withholding allowance claimed on the employee's form W-4.
- Determine the taxes to the withholding where the appropriate row and column meet for the number of withholding allowance claimed by the employee on line 5 of the form W- 4.
- Add any extra dollar amount of withholding indicated by the employee on the line 6 of the form W- 4.
The method most commonly used in computerized payroll systems is the percentage method. It applies to either single or married taxpayers for any pay frequency. Unlike the wage-bracket method, the percent- age method can be applied to any amount of wages.
Two tables located in Circular E are used to calculate federal income tax withholding using the percentage method; the withholding allowance table and the percentage table (see hand out).