How does payroll withholding work?

The withholding process starts when an employee completes Form W-4. This form indicates their filing status, dependents, and other factors that affect tax withholding. Employers use this information and IRS tax tables to determine how much federal income tax to withhold.

For FICA taxes, employers withhold a fixed percentage regardless of an employee's W-4 selections. These percentages are set by law. Employers must match these FICA contributions. State and local withholding requirements vary significantly. Some states have no income tax, while others have complex systems with multiple tax brackets.

What are the types of payroll withholdings?

Several categories of deductions may be withheld from employee paychecks:

• Federal income tax: Based on the information provided on an employee's Form W-4 and their earnings

• FICA taxes: Social Security (6.2% of wages) and Medicare (1.45% of wages)

• FUTA tax: Federal Unemployment Tax Act tax, paid by employers (not withheld from employee paychecks)

• State Unemployment Insurance (SUI): Varies by state, typically paid by employers but withheld from employees in some states

• State and local income taxes: Vary by location (some states don't collect income tax, such as Florida, Alaska, and Wyoming)

• Benefit deductions: Health insurance premiums, retirement contributions, and other voluntary benefits

• Garnishments: Court-ordered deductions such as child support or debt repayments

What are supplemental wages and special withholding rules?

Supplemental wages, including bonuses, commissions, overtime pay, and severance, follow different withholding rules than regular wages. These payments are typically taxed at a flat 22% federal withholding rate, though different rules apply for amounts exceeding $1 million (taxed at 37%). Employers must properly classify and report these supplemental wages on tax forms to ensure compliance with IRS regulations.