The Internal Revenue Service collects the federal payroll taxes that employers are supposed to withhold from employee paychecks. The state revenue or taxation agency oversees state income tax withholding. On occasion, city and local income tax withholding applies.
Federal Income Tax
The Current Tax Payment Act of 1943 made income tax withholding mandatory in the United States. Federal income tax is used to fund national programs, including law enforcement, defense and foreign affairs. The employer withholds the tax according to the allowances and filing status the employee claims on her W-4 form and the withholding tax tables in IRS Circular E. The withholding tax tables give the withholding amount based on the employee’s allowances, filing status, wages and pay period.
The Federal Insurance Contributions Act (FICA) is used to fund Social Security and Medicare programs. Social Security provides old-age, survivor’s and disability insurance to eligible individuals; Medicare provides hospital insurance to qualified individuals when they reach age 65. In 2011, employers withhold Social Security tax at 6.2 percent of gross compensation, up to $106,800 annually, and Medicare tax at 1.45 percent of all gross earnings.
State Income Tax
State income tax funds state programs, including correction and rehabilitative services, and public health, education and transportation. Nine states do not charge state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. If applicable, the employer withholds state income tax based on its revenue agency’s rules. Some states, such as Pennsylvania and Arizona require a flat percentage withholding; others require the employer to use the employee’s state withholding allowance certificate and the state withholding tax tables to compute state income tax.
City/Local Income Tax
City and local income tax withholding, such as City of Yonkers income tax and Ohio school district tax, are less common than FICA and federal and state income tax withholding. If applicable, the employer withholds them according to their respective guidelines. In most cases, the state revenue agency has the guidelines for these withholdings.
The employer reports the employee’s taxes withheld for the year to the Social Security Administration, and if applicable, the state and local income tax collectors via Form W-2. The employer gives the employee a copy of the W-2 to file his tax return. The employer is responsible for paying and reporting all taxes withheld to the appropriate revenue agencies. Although there is no federal requirement, if the state requires it, the employer gives employees a pay stub showing their deductions for the pay 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.