How to Deduct Taxes From Employee Wages
- 1). Deduct taxes from gross pay -- the employee's earnings before deductions occur. The only exception is if the employee has a pre-tax voluntary deduction, such as a traditional 401k plan or a pre-tax medical plan. In this case, withhold taxes after deducting the voluntary benefit from gross pay.
- 2). Deduct federal income tax based on the employee's W-4 form, and the IRS Circular E (see Resources). The Circular E has the federal withholding tax tables needed to figure federal income tax. Obtain the employee's filing status and allowances from Lines 3 and 5 of the W-4.
The IRS gives the employee a certain amount for each allowance claimed on the W-4. To arrive at the wages subject to taxation, subtract the total sum for allowances -- as shown on page 37 of the 2010 Circular E -- from the employee's gross pay. The more allowances the employee claims, the less federal income tax she pays.
The Circular E gives you the amount of federal income tax to withhold based on the employee's wages, pay period, allowances and filing status.
- 3). Withhold state income tax. State income tax applies to all states, except Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming and New Hampshire. Use your state taxation agency's guidelines to withhold state income tax. Most states require the employer to use the state withholding tax tables and the employee's state withholding allowance certificate to determine state income tax. Otherwise, the state may have a flat withholding tax rate. A few states, such as Nebraska, use the employee's W-4 for state income tax withholding purposes.
- 4). Calculate FICA taxes. The Federal Insurance Contributions Act authorizes Social Security tax and Medicare tax collection. Determine Social Security tax at 6.2 percent of gross wages, up to the annual wage limit of $106,800. Withhold Medicare tax at 1.45 percent of all gross wages.