:max_bytes(150000):strip_icc()/GettyImages-498335019-569d0f595f9b58eba4abf4dc.jpg)
What Percentage of Your Paycheck Is Withheld for Federal Taxes?
Updated on July 9, 2024 Reviewed byKhadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
In This Article In This Article
Are you considering doing your own payroll processing, or are you curious about the process in general? Calculating withholding and deductions for employee paychecks isn't difficult if you follow the steps detailed here.
Your goal in this process is to get from the gross pay amount (the actual amount you owe the employee) to net pay (the amount of the employee's paycheck). After you have calculated gross pay for the pay period, you then must deduct or withhold amounts for federal income tax withholding, FICA (Social Security/Medicare) tax, state and local income tax, and other deductions.
The Internal Revenue Service (IRS) requires that all workers in the U.S. sign IRS Form W-4 at hire. This form includes important information you need to pay the employee and to make sure withholding and deductions are correctly calculated on the employee's pay.
In addition to the employee's name and address, marital status, and filing status, you will need to get other information from the W-4 to do the withholding calculations for federal income tax.
Employee paychecks start with gross pay, which is the total amount of pay before any deductions or withholding. To determine income tax and FICA tax (for Social Security and Medicare), use all wages, salaries, and tips.
For salaried employees, start with the person's annual salary divided by the number of pay periods. For hourly employees, it's the number of hours worked times the rate (including overtime).
If you are not sure how to pay employees, read this article on the difference between salaried and hourly employees.
Here are examples of how gross pay for one payroll period is calculated for both salaried and hourly employees if no overtime is included for that pay period:
Let's say your employee makes an annual salary of $30,000. This salary is divided by the number of pay periods in the year to get the gross pay for one pay period. If you pay salaried employees twice a month, there are 24 pay periods in the year, and the gross pay for one pay period is $1,250 ($30,000 divided by 24).
An hourly employee is paid at an hourly rate for the pay period. If an employee's hourly rate is $12, and they worked 38 hours in the pay period, the employee's gross pay for that paycheck is $456 ($12 x 38).
All hourly employees are entitled to overtime if they work more than 40 hours in a week. Some salaried employees are exempt from overtime, depending on their pay level. Before July 2024, lower-paid salaried employees received overtime if their salary was equal to or less than $684 a week ($35,568 annually), even if they were classified as exempt. Beginning in July, that limit increased to $844 per week (equivalent to $43,888 per year), and starting in January 2025, it increases to $1,128 per week (or $58,656 per year).
You can pay more than the required overtime rate, but we'll use the required amount here. Some states also have overtime laws requiring that overtime is to be paid at higher rates. Check your state labor department for details.
Here's an example of how overtime is calculated:
Sandy works 43 hours in one week. She is entitled to overtime for three hours at 1.5 times her hourly rate. If her hourly rate is $12, she receives overtime at the rate of $18 for three hours, totaling $54 of overtime. This overtime of $54 is added to her regular hourly pay of $480 (40 hours x $12), for a total of $534. The $534 is her gross pay for the pay period.
Before you calculate FICA withholding and income tax withholding, you must remove some types of payments to employees. The types of payments not included in Social Security wages may be different from the types of pay excluded from federal income tax.
For example, if you hire your child (under age 18) to work in your business, you must take out the amount of their pay when you calculate Social Security withholding, but not take it out when calculating federal income tax withholding.
Here's another example: Your contributions to a tax-deferred retirement plan (like a 401(k) plan) should not be included in calculations for both federal income tax and Social Security tax.
IRS Publication 15 (Circular E) has a complete list of payments to employees and whether they are included in Social Security wages or subject to federal income tax withholding.
To calculate federal income tax withholding you will need:
The 2024 income tax brackets (to be filed in 2025) are as follows:
You must withhold FICA taxes (Social Security and Medicare) from employee paychecks.
Be sure you are using the correct amount of gross pay for this calculation. This article on Social Security wages explains what wages to take out for this calculation.
The calculation for FICA withholding is fairly straightforward.
| FICA Taxes: Who Pays What? | ||
|---|---|---|
| FICA Taxes (% of employee gross pay) | Employee Pays | Employer Pays |
| Social Security Tax 12.4% (Up to Annual Maximum) | 6.2% | 6.2% |
| Medicare Tax 2.9% (Up to $200,000) | 1.45% | 1.45% |
| Additional Medicare Tax | 0.9% on gross pay over $200,000 | 0% |
Withhold half of the total 15.3% from the employee's paycheck (7.65% = 6.2% for Social Security plus 1.45% for Medicare). The other half of FICA taxes is owed by you, the employer.
For a hypothetical employee, with $1,500 in weekly pay, the calculation is $1,500 x 7.65% (.0765) for a total of $114.75.
Be careful not to deduct too much Social Security tax from high-income employees since Social Security is capped each year, with the maximum amount being set by the Social Security Administration.
You will also need to consider the additional Medicare tax deduction due by higher-income employees, which begins when the employee reaches $200,000 in earnings for the year. The additional tax is 0.9% of the gross pay based on the employee's W-4 status. No additional tax is due from the employer.
Most states impose income taxes on employee salaries and wages. Do some research to determine the amounts of these deductions and how to send them to the appropriate state/local taxing authority.
You're not quite done yet with deductions. Here are some other possible deductions from employee pay you might need to calculate:
Remember, all deductions start with and are based on gross pay.
In the case of the employee above, the weekly pay stub would look like this:
| Employee Pay Stub | ||||
|---|---|---|---|---|
| Gross Pay | Federal Income Tax Withholding | FICA Tax Withholding | Other Deductions | Net Pay |
| $1,500.00 | $273.56 | $114.75 | $0.00 | $1,111.69 |
You must make deposits with the IRS of the taxes withheld from employees' pay for federal income taxes, FICA taxes, and the amounts you owe as an employer. Specifically, after each payroll, you must:
Depending on the size of your payroll, you must make deposits monthly or semi-weekly.
You must also file a quarterly report on Form 941 showing the amounts you owe and how much you have paid.
If you have many employees or don't have the staff to handle payroll processing, consider a payroll processing service to handle paychecks, payments to the IRS, and year-end reports on Form W-2.
Employers withhold 7.65% of your adjusted gross income for FICA taxes (6.2% for Social Security taxes and 1.45% for Medicare taxes) in addition to federal income tax. Depending on your income level, you fall into one of the following federal income tax brackets: 12%, 22%, 24%, 32%, 35%, and 37%.
If you don't see federal income tax being taken out of your paycheck, it is either because your employer considers you an independent contractor, meaning you will receive a 1099 and likely be required to pay quarterly estimated taxes, or you claimed exemption from federal income taxes (e.g. you do not expect to have a tax liability for the current year).
