How does my employer calculate my federal tax withholding

Form W-4: Employee’s Withholding Certificate

Each new employee must complete the IRS Form W-4, which tells you key information about how much federal income tax (FIT) you’ll need to withhold from their wages. The employee will enter their name, address, and social security number.

The W-4 was revised in 2020. The new form has a five-step process and a new Publication 15-T (Federal Income Tax Withholding Methods) for determining employee withholding. It no longer uses withholding allowances.

For employees hired in 2019 or prior, you can continue to use the information they provided on the old form W-4. It includes a worksheet that allows your employees to calculate withholding allowances for dependents and children. Some employees may want to fill out a new W-4 if they work a second job, get married, have a child, or get divorced, but you cannot require existing employees to complete a new one.

Employees can also elect to have additional tax withheld or request to be exempt from federal income tax withholding. The new form W-4 provides detailed instructions.

Make sure the employee signs the W-4, but don’t send it to the IRS unless requested. Retain it in your employee’s personnel file for a minimum of 4 years after the date of the employee’s latest tax return.

State W-4 (as applicable)

Some states have their own withholding forms. For states that don’t, the Form W-4 will often be used as the basis for calculating state and/or local income tax withholding. A complete list of applicable state tax forms can be found at the Federation of Tax Administrators website.

Direct Deposit Authorization Form

As an employer, you can pay your employees several different ways: paper check, direct deposit, prepaid debit card, or cash. Direct deposit is often the easiest and most secure way to deliver paychecks, which is why it is by far the most popular. In fact, more than 82% of US workers are now being paid by direct deposit.

An employee who chooses to be paid by direct deposit must fill out a direct deposit authorization form, complete with bank routing numbers and account numbers. The form acts as a permission slip for you to deposit the employee’s net pay electronically into their bank account.

As part of the verification process, many employers will ask for a voided blank check to confirm the accuracy of the bank account information provided by the employee.

Form I-9: Employment Eligibility Verification

New employees fill out a Form I-9 to certify that they are legally permitted to work in the United States (i.e. as a citizen, permanent resident, work visa holder, etc.). They can prove their work status by either providing you their US passport or both their driver’s license and Social Security card.

You are required by law to obtain a signed Form I-9 from your employee before employment commences. You should retain the completed form and any supporting documents in your employee’s personnel file.

Best Practice

You might also want to have new employees acknowledge their receipt of the company handbook, code of conduct, and any other formal policies at this time. While the acknowledgment isn’t necessary for payroll calculations, it’s a best practice to have your new employees complete all required company forms at the same time. HR software can make it easy to manage all these tasks.

To calculate your federal withholding tax, find your tax status on your W-4 Form. Based on the number of withholding allowances claimed on your W-4 Form and the amount of wages, calculate the amount of taxes to withhold. If you participate in tax deferred retirement, pre-tax benefits (health insurance premium) or dependent care spending deductions, subtract those amounts from gross pay as well. The remainder is subject to withholding tax at the rate in the appropriate section below.

Effective 02/01/2018

Single Person (including head of household)

SUBTRACT $345.80 FOR EACH EXEMPTION CLAIMED 

Married Person

SUBTRACT $345.80 FOR EACH EXEMPTION CLAIMED Married Person