How to Withhold Income Taxes
- 1). Give employees a Form W-4 to complete. When an employer hires an employee he should have the employee fill out a W-4, stating his filing status and allowances. The W-4 information helps to determine how much federal taxes should be withheld from the employee's paycheck.
- 2). Use the IRS Withholding Tables (Circular E) to determine the amount of federal taxes to withhold. If you are using payroll software, it will calculate the employee's federal taxes based on the W-4 data entered into the system. If you must manually calculate the taxes, use the Circular E, which the IRS prints and distributes every year to all employers it has on record.
The employee's federal taxes are based on his filing status, number of allowances, income and pay frequency (for example, weekly or biweekly). Refer to the Circular E for the tax year you are computing and use either the wage bracket or the percentage method, as outlined in the Circular E to calculate the tax. - 3). Withhold state taxes, if applicable, from the employee's paycheck. Some states do not impose state tax so check with your department of labor agency to ensure you should be deducting state taxes. If so, ask for the rate for the current year. Further, find out if you are required to pay city or county taxes as well. State taxes are withheld at a percentage and are based on the employee's taxable income.
- 4). Deduct Medicare taxes. The Federal Insurance Contributions Act (FICA) regulates Medicare and Social Security taxes--see next Step concerning Social Security. Employers are required to withhold a certain percentage of taxes for the Medicare taxes. For 2010, the rate is 1.45 percent of all wages paid to each employee.
- 5). Withhold Social Security taxes. FICA requires employers to withhold Social Security taxes from all employees' paychecks. For 2010, the rate is 6.2 percent, up to the annual maximum of $106,800 of income. Once the employee has earned $106,800 for 2010, no more Social Security taxes should be withheld for that year. The withholding should resume at the start of the following year based on the rate for that year.