How to Figure Out Federal & State Withholding for Hourly Employees
- 1). Use the employee's Form W-4 and the IRS Circular E for the tax year you are computing. The latter contains the IRS tax withholding tables, which must be used to figure federal income tax withholding. Locate the employee's filing status and allowances on the W-4.
Use the wage bracket method (pg. 37 of the 2010 Circular E) if the employee claims 10 or fewer allowances. The wage bracket method also has an income limit; if the employee exceeds that bracket or has more than 10 allowances, use the percentage method. When using the latter, use the percentage method table (pg. 37 of the 2010 Circular E) and the Tables for Percentage Method of Withholding (pp. 39 -- 40) to figure the withholding. - 2). Calculate Federal Insurance Contributions Act (FICA) taxes. The U.S. government imposes FICA tax to fund Social Security and Medicare.
For 2010, the Social Security percentage is 6.2, up to the wage limit of $106,800. Once the employee reaches this yearly wage limit, stop withholding Social Security tax; resume the withholding at the start of the following year.
The Medicare withholding is 1.45 percent of all wages, with no wage limit. When computing Medicare tax, the employee's gross wages should always be taxed at this rate. - 3). Check if the employee is subject to state income tax withholding. Nine states do not have a state income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Note that some states, including New York, allow cities to collect city and county income or wage taxes. Check with the state department of labor to see if these taxes should be paid and at what rate.
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