Withholding Tax Primer

Step by step instructions on how to manually calculate Federal withholding taxes based on IRS Circular E.

Payroll withholding rates and rules are determined by the IRS and all state and local taxing authorities that require withholding. The objective is to have collected from the employee's periodic pay a close approximation of the taxes owed for the year. The difference is either a refund or tax bill on April 15th. Employees can adjust their marital status and exemptions (using Form W4 filed with your employer) to tweak their withholding amount. Your employer has no control over the amount of taxes withheld. All of the rates, tables and calculations can be found in the IRS Circular E for 2015.

Here are some Payroll terms that you need to understand:
Gross Pay. Amount of check before any deductions.
Net Pay (Also known as Take Home Pay). Amount of your pay check after deductions.
Annual Gross Pay. Gross pay times Pay Frequency.
Exempt Wages. Wages exempt from withholding. Normally calculated as number of exemptions times a fixed amount.
Pay Frequency. Number of times per year that you are paid.

Annualized Wages. Gross Pay times Pay Frequency.
Supplemental Pay. Pay received over and above your normal salary. (Examples are Commissions and Bonus) Federal and many states tax this type of pay at a flat rate.

Note: Hourly employees need to multiply their Hourly Rate by the number of Hours Worked in the Pay Period. Treat this amount as your Gross Pay.

Computerized withholding taxes are pretty straight forward. All of the calculations can be performed on a adding machine.

Multiply your Gross Pay by your Pay Frequency resulting in your Annual Gross Pay.

Federal Withholding Calculation (based on IRS Circular E, January 2015), and found on my Federal Withholding page.

Multiply your Federal Exemptions (as claimed on Line 5 of your 2015 Federal W4) by $4,000.00. This is your Federal Exempt Wages.

Subtract Federal Exempt Wages from Annualized Wages giving Federal Taxable Wages

Use either the Single Person or Married Person table based only your withholding marital status (Check box #3 on your 2015 Federal W4. Starting from the bottom of the table, find the row in the Earnings column that contain an amount that does not exceed your Federal Taxable Wages.

Your Annualized Federal Withholding amount is =
[(Federal Taxable Wages - Federal Addon Earnings) x Federal Addon Rate] + Federal Addon Amount

The Federal Withholding Amount on your paycheck is =
(Annualized Federal Withholding / Pay Frequency)

  Example #1: Single individual with 2 exemptions is paid $1,000.00 per week. Example #2: Married individual with 5 exemptions is paid $6,500.00 per month.
Amount Formula Amount Formula
Annualized Pay $52,000.00 $1,000.00 X 52 $78,000.00 $6,500.00 X 12
Federal Exempt Wages $8,000.00 $4,000.00 x 2 $20,000.00 $4,000.00 x 5
Federal Taxable Wages $44,000.00 $52,000.00 - $8,000.00 $58,000.00 $78,000.00 - $20,000.00
1st entry of the Withholding table where the Federal Taxable Wages exceed the Earnings column searching high to low. Line #3 of the Federal Single Persons table Line #2 of the Federal Married Persons table
Tax Table Earnings $39,750.00 $27,050.00
Tax Table Addon $5,156.25 $1,845.00
Tax Table Rate 25.00% 15.00%
Annualized Federal Withholding $8,218.75 [( $44,000.00 - $39,750.00 ) * 25.00% ] + $5,156.25 $6,487.50 [( $58,000.00 - $27,050.00 ) * 15.00% ] + $1,845.00
Federal Withholding Amount $119.59 $6,218.75 / 52 $124.76 $6,487.50 / 12
FICA (Social Security) Withholding Medicare Withholding
Annual Income Less Than $118,500.00 Annual Income Over $118,500.00 Annual Income Less Than $200,000.00 Annual Income Over $200,000.00

Current Earnings x 6.20%

Year to date earnings the excede $118,500.00 are exempt from FICA (6.20%)

FICA calculation takes into account the following factors

  • Year to date earnings
  • Current paycheck earnings
  • Year to date FICA withheld

FICA Taxable: YTD Earnings or FICA Annual Limit (Whichever is lower)

FICA calculation: (FICA Taxable x 6.20%) - FICA Withheld YTD

Current Earnings x 1.45%

Year to date earnings the excede $200,000.00 are exempt from Medicare (1.45%), but are subject to the Excess Medicare (0.90%)

Medicare calculation takes into account the following factors

  • Year to date earnings
  • Current paycheck earnings
  • Year to date Medicare withheld

Medicare Taxable: YTD Earnings or Medicare Limit (Whichever is lower)

Additional Medicare Taxable: YTD Earnings - $200,000.00

Medicare calculation:
(Medicare Taxable x Medicare Rate) + (Additional Medicare Taxable x Additional Medicare Rate) - Medicare Withheld YTD