CARL WATTS & ASSOCIATES

July 01, 2019

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Employee Withholding Tax
As you know, the United States income tax is based on a pay- as-you-go (or pay-as-you-earn) system and this can be done in two ways: withholding tax and estimated tax. We have recently explored the realm of estimated tax payments, so today we shall concentrate on the withholding tax.

Under the existing tax withholding system, taxes are collected at the source, meaning that wage earners never see the money that they owe in taxes, it’s taken out of their paychecks and transmitted directly to the federal government by their employers.


Some workers are considered self-employed and are responsible for paying taxes directly to the IRS. Often, this includes people involved in the gig or sharing economy. One way to pay taxes directly to the IRS is by making estimated tax payments during the year.

Independent contractors aren't subject to withholding, and neither is the income earned by investors, but individuals are responsible for calculating and remitting their own tax payments on a quarterly basis.

The general rule for everybody is that at least 90% of taxes owed is either withheld on each paycheck or paid in estimated taxes throughout the year.

Payroll withholdings include:

  • Federal income tax;

  • State income tax;

  • Employee portion of Social Security tax;

  • Employee portion of Medicare tax;

  • Court-ordered withholdings;

  • Other withholdings.

The amount withheld depends on:

  • The amount of income earned and

  • Three types of information an employee gives to their employer on Form W–4, Employee's Withholding Allowance Certificate:

1.
Filing status: either the single rate or the lower married rate.

2.
Number of withholding allowances claimed: each allowance claimed reduces the amount withheld.

3.
Additional withholding: an employee can request an additional amount to be withheld from each paycheck.


Withholding allowances are exemptions from federal income tax. The more allowances you claim, the less money your employer will withhold for taxes. You get one allowance for yourself, one for your spouse and one for each dependent you report on your tax return, head of household filing status, child care expenses, or child tax credit.

You can also claim additional allowances if the additional income that you end up reporting on your tax return may put you in a higher tax bracket or have additional taxes associated with it. This usually happens if you work more than one job, have self-employment income or if your spouse earns income too.


In addition to the employee’s withholding allowance information, the employer must use the income tax withholding tables, which the IRS publishes every year, in IRS Publication 15 to determine federal income taxes. These tables provide ranges based on pay frequency, filing status, and withholding allowances. There are two methods you can choose from to determine an employee’s federal income tax withholding.

With the wage bracket method, the employer must find the range the employee’s wages fall under. Then, using their claimed allowances, find the amount to withhold.

The percentage method is a little different. The employer must multiply the amount of one withholding allowance by the number of allowances the employee claims and subtract that from the employee’s wages. Then, find the range for that number and calculate the tax amount.

It is now the right time to remind you that the Tax Cuts and Jobs Act of December 2017 brought changes to the tax rates and brackets, an increase in the standard deduction, and the elimination of personal exemptions, all important factors in calculating the right employment tax.
For tax year 2019, one withholding allowance is set at $4,200.00 annually (up $50 from 2018), while the standard deduction is $12,200 for singles ($24,400 for married filing jointly).

FICA, which stands for the Federal Insurance Contributions Act, sums up the amount employers are responsible for taking out of your pay in order to provide funding for certain government programs, notably the Social Security insurance program and the Medicare health insurance program.

The Social Security part of FICA is a 6.2% tax applied to earnings up to $132,900. Above that amount, you no longer have to pay any SS payroll tax. Medicare tax isn't subject to an earning limit. Unlimited wages and salaries are subject to the 1.45% Medicare withholding tax.

As a rule, your employer matches the amount withheld for FICA from your paycheck, so that the final contribution is 12.4% total tax on Social Security and 2.9% on Medicare.

You may claim exemption from withholding for 2019, for instance, if both of the following apply.

  1. For 2018 you had a right to a refund of all federal income tax withheld because you had no tax liability, and

  2. For 2019 you expect a refund of all federal income tax withheld because you expect to have no tax liability.

The federal withholding system provides the model that 41 states use to withhold state income taxes - nine states: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming don't have a state income tax.

The income state tax, for the 41 states that require it, works pretty much like the federal income tax; of course rates differ from state to state.

Of those states taxing wages, nine have single-rate tax structures, with one rate applying to all taxable income. Conversely, 32 states levy graduated-rate income taxes, with the number of brackets varying widely by state. Top marginal rates range from North Dakota’s 2.9 percent to California’s 13.3 percent.


With all this info in mind, it is important to remember to check your withholding when any of the following situations occur:

  • You receive a paycheck stub (statement) covering a full pay period in the year, showing tax withheld based on annual tax rates.
  • You prepare your previous year tax return and get a big refund, or a balance due that is:

a.
More than you can comfortably pay, or

b.
Subject to a penalty.


  • There are changes in your life or financial situation that affect your tax liability.

  • There are changes in the tax law that affect your tax liability.

If you find you are having too much tax withheld because you did not claim all the withholding allowances to which you are entitled, you should give your employer a new Form W–4. Your employer cannot repay any of the tax previously withheld.

Taxpayers with more complex situations may need to use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes employees who owe self-employment tax, the alternative minimum tax, or tax on unearned income by dependents.

Publication 505 can also help those who receive non-wage income such as dividends, capital gains, rents and royalties.The publication includes worksheets and examples to guide taxpayers through these special situations.

U.S. citizens, resident aliens, or their estates who are recipients of pensions, annuities, and certain other deferred compensation can fill out Form W-4P, Withholding Certificate for Pension or Annuity Payments, to tell payers the correct amount of federal income tax to withhold from their payment(s).

You also may use Form W-4P to choose (a) not to have any federal income tax withheld from the payment (except for eligible rollover distributions or for payments to U.S. citizens to be delivered outside the United States or its possessions) or (b) to have an additional amount of tax withheld.


You can use the IRS Withholding Calculator tool to decide what your withholding should be, although you would be better off just following the Instructions for Form W-4.

No matter the tool you decide to use, if you want to make sure you are taking the right decisions in all your dealings with the IRS, and especially so when new rules are in place, help from a tax professional is both invaluable and necessary.
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