The term federal income tax withholding refers to the money that an employer deducts from an employee’s gross wages to pay directly to the IRS. The process is a key component of the ‘pay-as-you-go’ tax system that’s used in the United States and ensures that income tax payments are spread evenly throughout the year rather than collected in one lump sum. 

The money collected through withholding is substantial and amounts to over 50% of federal government revenue over the past year, totalling $2.3 trillion.

How it Works

When an employee begins a new job, they complete a Form W-4, which is the Employee’s Withholding Certificate. This form provides employers with the information they need to calculate the correct amount of federal income tax to withhold from each paycheck. 

The 2020 revision of the Form W-4 eliminated the concept of withholding allowances, switching to more direct information to determine matters of tax liability. 

When it comes to the federal income tax withheld from an employee’s paycheck, there can be many factors that affect the total amount owed to the IRS, including: 

  • Filing status (whether the employee is single, married filing jointly, or head of household)
  • The number of jobs worked by the employee or their spouse
  • Tax credits eligible to claim (for children and other dependents)
  • External sources of income, such as investments or other deductions expected
  • Any additional tax requested to be withheld

Federal income tax withheld can also be affected by the tax credit status of the employee. Here, the amount of tax withheld is considered a credit towards the total annual tax liability.

Calculating Federal Income Tax Withholding

Employers are legally required to withhold employment taxes from their employees’ paychecks. The taxes liable to be paid include Social Security and Medicare contributions. 

The current tax rate for Social Security amounts to 12.4%, which is split evenly between the employee and employer. For Medicare, the current tax rate is 2.9%, which is also paid half by the employer and half by the employee. For self-employed workers, these rates are paid in full on the employee side. 

The wage base limit for Social Security is $168,600. If an employee earns more than this figure, the employer will stop withholding and contributing for that employee. However, if a worker earns more than $200,000 in wages regardless of their filing status, employers are responsible for an additional 0.9% Medicare tax.

Changes to Employee Withholding Figures

What factors can cause changes to the federal income tax withholding figures? Various life changes can impact tax liability, and the IRS recommends that employees review and update their Form W-4 whenever the following changes happen: 

  • Marriage or divorce
  • The birth or adoption of a child
  • Starting or finishing a second job
  • Buying a home

Employees should notify their employer’s payroll teams of possible taxation changes when any of these life events occur.

FAQs

Employees should revise their withholding whenever a life change occurs. This means marriage status changes, having or adopting a child, buying a house, earning a promotion, or just about any other event that could impact their cash flow or eligibility for deductions.

Employees can review and update their Form W4 to make changes to their federal income tax withholding. It’s recommended that they undertake this process at the end of every year to take advantage of any changes or issues before the new year begins. Online tools like the IRS Tax Withholding Calculator can be a useful tool in calculating withholdings accurately.