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9 Min. Read

FITW Tax: What It Is and How to Calculate

FITW Tax

FITW tax is “Federal Income Tax Withholding.” This is the tax that is deducted from your paycheck and is paid on other income like pensions, bonuses, commissions, and gambling winnings. 

If calculated correctly, this withholding should cover your annual income tax payments. It is an estimated amount and is paid so that you are not faced with a huge tax bill at the end of the year. In a way, it is like a payment plan for the year’s income taxes.

Key Takeaways 

  • Federal Income Tax Withheld is automatically deducted from many working Americans’ taxable wages as income tax payments. 
  • Income taxes pay for important public services including education, transportation, and law enforcement in local communities. 
  • The more money a person earns, by working additional hours or earning bonuses, the more tax the employer withholds from the employee’s wages.
  • A W-4 form is used to tell employers how much tax to withhold from an employee’s wages for taxes. 
  • Although monthly take-home pay is reduced, the amount of FITW employers withhold can ensure employees don’t have a big tax bill at the end of the year. 
  • Accounting software can help small business owners keep track of all tax payments and their employees’ FITW withholdings.

Table of Contents

What is FITW Tax (Federal Income Tax Withholding)

If you are working in the United States, you will likely see a deduction on your paycheck titled “Federal Withholding,” “Federal Income Tax,” or “FITW tax,” meaning a certain amount of money is taken out of your paycheck and paid to the Internal Revenue Service on your behalf. It is calculated and deducted from your gross income. 

The more you earn, the more money is deducted. This is done to cover your federal income taxes for the year, with the goal of paying enough to the IRS that you do not owe any additional income tax during tax time.

Income taxes pay for public services like social security, defense, health care, education, agriculture, law enforcement, and transportation.

Less Taxin', More Relaxin'

How Does FITW Tax Work?

So what is FITW tax on your paycheck? When you are first hired at a company, the IRS requires that you fill out Form W-4 Employee Withholding Certificate. This form lets your employer know how much federal income tax should be withheld from your gross pay. The information on the form combined with the amount you earn each pay period will determine how much tax is withheld. This amount is then sent by the employer to the Internal Revenue Service.

While self-employed individuals and small business owners have to make estimated income tax payments on their own, if you are an employee who has FITW taxes taken off your total earnings every pay period, you will likely not owe anything, or you may even qualify for a tax return, getting money back from the IRS. 

Having a W-2 job and being self-employed puts you in a hybrid position, in which you may want to adjust your Form W-4 to cover the additional tax due with the withholding from your job’s paycheck.

Understanding taxes can be complicated, which is why seeing a tax advisor and using accounting software like FreshBooks can help. Whether you are a business owner or an employee, watch the following video to find out how Freshbooks can make tax preparation easier for you. 

Federal Income Tax Withholding Calculation

Employers must use IRS-determined tax brackets to figure out how much tax should be deducted from each employee’s taxable wages. For 2023, for example, some FIT tax brackets for a single filer are as follows:

  • If your taxable income is not over $11,000, the tax due is 10% of your income
  • If your taxable income is over $44,725, but not over $95,375, the tax due is $5,147 plus 22% of anything that was earned that exceeds $44,725. 
  • If your taxable income is over $578,125, taxes due are $174,238.25 plus 37% of anything over $578,125.

As you can see, the more you earn, the more money is owed to the IRS when using this wage bracket method. 

If you are curious about how much tax will be taken from your paycheck, the IRS makes calculating simple federal tax withholding easy, with an easy-to-use estimator available on their website. As a small business owner with employees, it’s easy to integrate your payroll software with FreshBooks.

Form W-4

Form W-4 (aka the Employee’s Withholding Certificate) is part of the paperwork new employees fill out when they first start working at a new company. It tells the employer how much tax to withhold. 

  • This form includes the employee’s personal information (name, address, Social Security Number, and tax filing status)
  • There is space to account for multiple jobs, or their spouse’s job if you file taxes jointly
  • Employees can claim their dependents on this form, ask for extra tax to be withheld, or note other deductions beyond the standard deduction here as well
  • The form must be signed and dated to be considered complete

The amount of taxes paid to the IRS on the employee’s behalf can make a big difference to them during tax time, as they may owe a tax bill, or receive a tax refund, depending on how much was taken out from each paycheck.

Making a Federal Income Tax Deposit

Federal income and employment taxes (e.g. FICA) must be deposited on a regular and predetermined payment schedule to the IRS. Some employers make semi-weekly deposits, while others make monthly ones. Business owners must use electronic funds transfers to make all federal deposits. Those deposits are made either through your payroll software or you can make them on the IRS’ EFTPS site. If you fail to pay on time, you may be subject to a failure-to-deposit penalty of up to 15%.

Every quarter a Form 941, Employer’s Quarterly Federal Tax Return, must also be filed. Besides listing taxable wages, it also includes withholding on sick pay and supplemental unemployment benefits. There are additional forms to be filed if you pay farmworkers, or when employers are required to withhold federal income tax from non-payroll payments. 

All forms can be found on the IRS website, or you can speak with a tax professional regarding your tax filing requirements for your business. 

Reporting Federal Income Tax

Before beginning, get all of the necessary paperwork ready. Prepare all of your W-2 forms, along with any earning and interest statements, like 1099, 1099-INT, etc, and all receipts for the deductions you plan to make.

You will also want to choose whether you want to take the standard deduction, or itemize your return, and decide upon your filing status (married, single, head of household, etc.) before you begin. 

Ensure you submit your return by the filing deadline. Using tax preparation software makes it easier to e-file your taxes, This is the method recommended by the IRS. You may also file by mail, but this can add up to 6 months to the processing time. 

Streamline Your Tax Preparation With Freshbooks

Tax preparation does not need to be stressful, nor does it need to take up a lot of your time. Speaking with a professional tax advisor can help you understand more complex processes, while incorporating a user-friendly accounting software like FreshBooks into your process can make tax preparation a breeze. Any taxpayer can utilize FreshBooks to stay organized and maximize tax deductions to make tax time easier. 

Capture, track, and categorize your expenses throughout the year, and make it easier to file your annual taxes using this simple, user-friendly software. Sign up for a trial and try FreshBooks for free to find out just how easy tax time can be. Get the most out of your tax deductions, and file on time with FreshBooks.

Turn Tax Pains Into Tax Gains

FAQs About FITW Tax

To find out more about what federal income tax withholding is, and to learn more about what the withholding amount should be on your employee’s paychecks, please see the following answers to some frequently asked questions.

Why is my federal withholding so high?

The higher your income is, the larger the percentage of your income that will be taken out of your paycheck. If you believe too much is being withheld, you can check your W-4 form, to make sure that all of your information is correct. 

What happens if too much is withheld from your paycheck?

If more money is withheld from your paycheck than you owe in taxes, you will receive a tax refund. This is a common occurrence and is not something to worry about. If you are self-employed or own a business, using accounting software like FreshBooks can make sure you stay on top of your finances, and maximize your deductions at the end of the year, so you can get an even bigger refund.

How much federal tax is taken out of a paycheck?

The exact amount depends on how much you earn (which tax bracket you are in), and what information you have provided on your Form W-4. If you want your employer to withhold a larger FITW tax deduction throughout the year, you can file a new W-4 form with them, and they will send more money to the IRS from each paycheck.

How do you avoid federal withholding tax?

It is illegal to avoid paying taxes, however, you might get exempt if you had no federal income tax liability in 2023 and are expecting not to have any tax liability in 2024. You can also reduce the amount owed with tax write-offs for charity donations, property taxes, or mortgage interest. Tax credits can also lower the amount of taxes owed. FreshBooks can help you track all income, expenditures, and deductions, making tax time easier.

Who is exempt from federal taxes?

In the USA, charitable organizations, churches, religious organizations, private foundations, political organizations, and nonprofits are tax-exempt. Some people who had no federal tax liability in the previous year and are expecting not to have any tax liability in the current year may get a federal income tax withholding exemption.


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Sandra Habiger

About the author

Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .

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