According to the Tax Policy Center, in 2007, payroll taxes funding social security, Medicare, and unemployment benefits plus other smaller retirement plans, accounted for approximately $870 billion in federal revenue. The employer must withhold applicable payroll taxes from employees’ wages.
Types of Employee Paycheck Withholding
Employers are required by law to withhold federal income tax, Medicare and social security taxes, and in most cases, state income tax. Medicare and social security taxes are collected under the authority of the Federal Insurance Contributions Act, hence FICA taxes.
Purpose of Employee Paycheck Withholding
The government uses federal income tax withholding to fund national programs, such as defense and law enforcement, according to the IRS. State income tax withholding funds the state’s public system. This includes funding for state unemployment benefits, and for public schools, corrections and rehabilitation programs and environmental protection.
Medicare tax withholding provides medical benefits to eligible employees and retirees and their spouses upon reaching age 65. Social security tax is also called OASDI (Old-Age, Survivors, and Disability Insurance). Social security tax provides disabled individuals and retirees and their beneficiaries with retirement benefits.
FIT Employee Paycheck Withholding
The amount of federal income tax (FIT) the employee pays depends on his filing status, number of exemptions and the IRS’ withholding tax tables. IRS Circular E contains the withholding tax tables. The employer uses the Circular E for the relevant the tax year when figuring federal income tax. Payroll software has the withholding tax tables hard-coded in the system. It calculates the tax based on the W-4 data (filing status and allowances) inputted in the system.
The employer can determine the federal income tax manually using either the Circular E’s wage bracket method or the percentage method. It uses the wage bracket method if the employee claims fewer than 10 allowances and her wages are within the wage bracket method income limit; it uses the percentage method whenever it wants to.
FICA Employee Paycheck Withholding
Employers withholds Medicare tax at 1.45 percent of all gross wages. It pays a matching amount. Social security tax is withheld at 4.2 percent (for 2011) of the employee’s gross income, until she has reached the yearly wage limit of $106,800; the employer pays 6.2 percent.
State Employee Paycheck Withholding
The employer withholds state income tax from the employee’s paycheck only if the state charges the tax. The following states do not charge state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. In many instances, the state requires the employer to use the state withholding tax tables and the employee’s filing status and number of allowances stated on his state income tax withholding form to determine the withholding amount. The employer can check with its state revenue agency to know if city and/or local income tax withholding applies.
Tips for Employee Paycheck Withholding
The employer pays federal income tax, and Medicare and Social Security taxes to the IRS, usually semi-weekly or monthly. The IRS determines the deposit schedule. The employer reports the employees’ yearly withholding on their W2. It files the W2 with the Social Security Administration. The latter forwards the information to the IRS.
Grace Ferguson - Grace Ferguson has been writing since 2000. She writes website content and other areas of nonfiction regularly for private clients. Grace ...
Join the Conversation