The federal government mandates employers to withhold federal income tax from workers’ pay. Failure to withhold appropriately can result in a penalty of the unpaid tax and interest. The employer reports federal income tax withholding to the Internal Revenue Service, according to the schedule it mandates--typically, quarterly or annually. Federal income tax includes many other aspects.
The IRS is the statutory organization that oversees the collection and reporting of federal income tax. The institution notes that federal income tax is used to fund national programs, such as defense, law enforcement and foreign affairs. Only the employee is subject to federal income tax withholding.
The employer is required to give new employees a W-4 to complete. The completed W-4 informs the employer of the employee’s federal income tax withholding terms, such as his exemptions and filing status. Furthermore, if he wants to change his existing withholding conditions, the employer must give him a new W-4 to complete.
The Internal Revenue Service sends employers a new Circular E each year. The latter has the federal income withholding tax tables. The employer uses the latter and the W-4 to compute the tax.
Once the employee receives the W-4 from the employer, it’s his responsibility to complete and submit it. If he fails to do so the employer can put him in the highest tax bracket (single/zero) until he complies. He’s also responsible for ensuring that he indicates the proper withholding conditions--claiming too many exemptions can result in him owing the IRS and claiming too few can cause him to pay too much federal income tax. In the latter case, he must wait until he files his tax return to get a refund. The IRS has an online withholding calculator and Publication 919, which help workers adjust their withholding to avoid excess or too little federal income tax withholding.
The Circular E has two federal income tax calculation methods: wage bracket and percentage. It should use the former if the employee has more than 10 exemptions and her income is within the wage range. It can use the latter under any circumstance; no wage or exemptions limit apply. Social Security and Medicare tax withholding depend on the flat percentage the government sets; but federal income tax withholding depends on a number of factors. Specifically, it’s based on the employee’s income, filing status, exemptions, and the federal tax tables.
For example, an employee who claims married/one and earns $500 per week in 2010 would pay $17 weekly. But if another employee earns the same amount but claims single/two, her weekly withholding would be $33. This is because claiming single with only two exemptions places her in a higher tax bracket. The employer should not assume or guess federal income tax withholding; it should consult the appropriate tax tables for proper withholding.
The employer makes federal income tax and FICA tax payments to the IRS, ordinarily either semiweekly (twice per week) or monthly. Late deposits can result in related penalties. Furthermore, employees are required to file their annual tax return indicating federal income tax withholding by April 15.
- IRS: Understanding Taxes
- IRS: 2010 Circular E
- 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.
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.