Types

• Employees are required to pay federal income tax, Social Security tax, and Medicare tax via payroll withholding. The majority of states charge state income tax, except Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. In rare instances, the city or local government require city or local income tax withholding.
  
  

Withholding Form

• New employees complete a W-4 form, which help the employer determine the amount of federal income tax to withhold from its employees' paychecks. The employer is responsible for giving the employee the form upon hiring him. The employee states his filing status, withholding allowances, and any additional income tax he wants withheld from each paycheck on the form. The employee can claim an allowance for himself, his spouse, his dependents, and for filing as head of household on his tax return. Each allowance gives him a specific amount that lowers his taxable income. The majority of states use a similar system for state income tax withholding. Some states use the employee's W-4 form, others have their own withholding form.
  
  

Amounts

• The employer takes the employee's filing status and allowances from her W-4, and uses the Circular E's withholding tax table relevant to her income, pay period, filing status, and allowances to figure federal income tax. Social Security tax is computed at 6.2 percent of gross income, up to $106,800 yearly. Medicare tax is computed at 1.45 percent of all gross earnings.
  
  The employer uses the state revenue agency's guidelines to figure state income tax. Many states have their own withholding tax tables that the employer uses with the employee's state withholding tax form to figure the tax. A few states use a flat percentage.
  
  

Exceptions

• Payroll taxes apply to all employees unless an exception applies. The employee can claim exempt from federal and state income tax withholding if he owed no taxes in the last year and expects to not owe any in the current year. Social Security tax and Medicare tax exemptions include students employed by a school at which they are also a student, and non-immigrants and nonresident aliens with certain visas.
  
  

Considerations

• The employer deducts payroll taxes from gross wages unless the employee has a voluntary pretax deduction. In this case, the employer deducts the pretax benefit from gross income before withholding taxes. Pretax deductions reduce the employee's taxable income. If city or local income tax applies, the employer can consult the state revenue agency for the withholding calculation. For example, Yonkers city income tax depends on the Yonkers withholding tax tables and the employee's withholding allowance certificate used for state and city purposes.