All businesses that have employees must withhold federal income taxes and the employees' share of FICA taxes for all employees, including the owner if the business is incorporated. These withholdings are taken out of each employee's paycheck every pay period. For businesses and employees, it's important to know how to calculate the amount of federal withholdings. For businesses, accurately and properly calculating and withholdings can prevent costly fines from the IRS. For employees, properly calculating your federal income tax withholdings can prevent either underpaying or overpaying federal income taxes.
A portion of federal withholdings goes to FICA taxes. FICA includes Social Security payments and Medicare payments. The total amount of FICA tax is 15.3 percent of the total gross earnings of each paycheck. The Social Security portion of FICA, which totals 12.4 percent, is split between the employer and employee evenly. The Medicare portion of FICA total is 2.9 percent and also is split evenly between the employer and employee. The total FICA tax withholding for the employee is 7.65 percent of gross earnings. However, the Social Security portion of the FICA tax has an income cap of $108,500. Any employee earnings above $108,500 are not subject to the 6.2 percent Social Security portion of the FICA tax, but the 1.45 percent of Medicare tax withholding does not have an income cap. Employers are responsible for paying its entire 7.65 percent portion of the FICA tax even if the employee has reached the income cap.
The amount of income tax that is withheld from an employee's paycheck depends on the information that is derived from the employees' W-4 forms and the frequency of the pay periods. The W-4 form includes the employees' marital status and claimed withholding allowances. The Internal Revenue Service issues an employees' income tax withholding table, which takes into account employees' marital status, claimed allowances and how often they are paid. For example, for 2011, the annual personal tax exemption is $3,700. The monthly claimed allowance equals $308.33 per claimed allowance. If pay periods are every two weeks, divide $3,700 by 26 weeks to equal $142.31 for each claimed allowance.
According to the 2011 federal income tax table, the income tax withholding for a single employee with one claimed allowance who gets paid every two weeks would be calculated as gross pay minus claimed allowance dollar amount to equal taxable income. If the taxable income is more than $408 but less than $1,408, the income tax withholding is $32.70 plus 15 percent of the amount in excess of $408. For businesses, the IRS website provides downloadable up-to-date tax tables if payroll is done manually. However, most businesses can purchase tax software that automatically computes the correct amount of withholdings. It's important for businesses to make sure they have the most current federal income tax withholding tables or software program.
For individuals who are unsure how to complete the W-4 form to maximize take-home pay without underpaying taxes, the IRS website also offers an automatic W-4 calculator, which can help employees determine the best withholding amounts.