How to Calculate Withholding Tax: A Simple Payroll Guide for Small Business
Small businesses need to calculate withholding tax to know how much money they should take from employee paychecks to send to the Internal Revenue Service to cover tax payments. Employers calculate withholding tax by referring to an employee’s Form W-4 and the IRS’s income tax withholding table to determine how much federal income tax they should withhold from the employee’s salary or wages. There are two main methods small businesses can use to calculate withholding tax: the wage bracket method and the percentage method. To calculate withholding tax, you’ll need the following information:
- Your employees’ W-4 forms
- Each employee’s gross pay for the pay period
- The IRS income tax withholding tables and tax calculator for the current year
Small business owners should learn how to calculate withholding taxes to make sure employees are being taxed at the correct rate.
These topics take you through how to calculate withholding tax:
How to Calculate Withholding Tax
To calculate withholding tax, the employer first needs to gather relevant information from the W-4 form, review any withholding allowances and then use the IRS withholding tables to calculate withholding tax. Here are the steps to calculate withholding tax:
1. Gather Relevant Documents
First, gather all the documentation you need to reference to calculate withholding tax. The withholding tax amount depends on a number of factors, so you’ll need the employee’s W-4 to help with your calculations, as well as the withholding tax tables and the IRS worksheet.
2. Review the Employee’s W-4 Forms
Next, refer to the employee’s Form W-4 to find the following information relevant to the withholding tax calculations:
- Whether the worker is married or single
- The number of allowances the employee claims
- Any additional amounts that the employee requests to be withheld
3. Review Payroll Details
You’ll need to gather information from payroll to calculate employee withholding tax. Here’s the information you’ll need for your calculations:
- Payroll period details, including the frequency of your pay periods (weekly, biweekly or monthly) and the amount of time for that particular period
- The gross pay amount for the pay period, i.e. the total amount paid for the pay period, either in salary or wages
4. Choose Your Calculation Method
Once you’ve gathered all the W-4 and payroll information you need to calculate withholding tax, you need to choose a calculation method. There are two methods you can choose from:
- The Wage Bracket Method: The wage bracket method of calculating withholding tax is the simpler of the two methods. You’ll use the IRS income tax withholding tables to find each employee’s wage range. You then include the employee’s withholding allowances to find the correct amount of withholding tax.
- The Percentage Method: The percentage method is more complex. To use it, you first need to find the amount for one withholding allowance based on the pay period. Then, multiply that amount by the total number of allowances the employee claims. Subtract that figure from the employee’s salary or wages. Finally, use the tables to find the correct range for that figure and calculate the tax amount.
What Are Withholding Allowances?
Withholding allowances are exemptions that employees can claim from federal income tax, using Form W-4. Withholding allowances are used to determine an employee’s withholding tax amount on their paychecks. The more allowances an employee chooses to claim, the less federal tax their employer will deduct from their pay.
To figure out how many allowances apply to them, employees can refer to the Form W-4 worksheets. A worker can claim a withholding allowance for:
- A spouse
- All dependents
- Child care expenses and tax credits
- Filing as the head of the household
In some cases, an employee might be exempt from federal tax withholding.
What Is the Income Tax Rate for 2018?
The federal income tax has seven tax rates for 2018: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. The amount of federal income tax an employee owes depends on their income level and filing status, for example, whether they’re single or married, or the head of a household. You can find your 2018 federal income tax rate based on your filing status by using the IRS income tax rates and brackets.