How to Calculate Withholding Tax: A Simple Payroll Guide for Small Business
Small businesses need to calculate withholding tax to know how much money they should take from employee paychecks to send to the Internal Revenue Service to cover tax payments.
Employers calculate withholding tax by referring to an employee’s Form W-4 and the IRS’s income tax withholding table to determine how much federal income taxes they should withhold from the employee’s salary or wages.
There are two main methods small businesses can use to calculate federal withholding tax: the wage bracket method and the percentage method.
To calculate withholding tax, you’ll need the following information:
- Your employees’ W-4 forms
- Each employee’s gross pay for the pay period
- The IRS income tax withholding tables and tax calculator for the current year
Small business owners should learn how to calculate withholding taxes to make sure employees are being taxed at the correct rate.
These topics take you through how to calculate withholding tax:
In this article, we’ll cover:
How to Calculate Withholding Tax
What Are Withholding Allowances?
What Is the Income Tax Rate for 2018?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
How to Calculate Withholding Tax
To calculate withholding tax, the employer first needs to gather relevant information from the W-4 form, review any withholding allowances and then use the IRS withholding tables to calculate withholding tax.
Here are the steps to calculate withholding tax:
1. Gather Relevant Documents
First, gather all the documentation you need to reference to calculate withholding tax. The withholding tax amount depends on a number of factors, so you’ll need the employee’s W-4 to help with your calculations, as well as the withholding tax tables and the IRS worksheet.
2. Review the Employee’s W-4 Forms
Next, make sure you have the correct form. You’ll need to refer to the employee’s Form W-4 to find the following information relevant to the withholding tax calculations, including their filing status, number of dependents, additional income information, and any additional amounts that the employee requests to be withheld.
3. Review Payroll Details
You’ll need to gather information from payroll to calculate employee withholding tax. Here’s the information you’ll need for your calculations:
- Payroll period details, including the frequency of your pay periods (weekly, biweekly or monthly) and the amount of time for that particular period
- The gross pay amount for the pay period, i.e. the total amount paid for the pay period, either in salary or taxable wages
4. Choose Your Calculation Method
Once you’ve gathered all the W-4 and payroll information you need to calculate withholding tax, you need to choose a calculation method. There are two methods you can choose from:
- The Wage Bracket Method: The wage bracket method of calculating withholding tax is the simpler of the two methods. You’ll use the IRS income tax withholding tables to find each employee’s wage range. The instructions and tables can be found in IRS Publication 15-T.
- The Percentage Method: The percentage method is more complex and instructions are also included in IRS Publication 15-T. The instructions are different based on whether you use an automated payroll system or a manual payroll system. The worksheet walks you through the calculation, including determining the employees’ wage amount, accounting for tax credits, and calculating the final amount to withhold.
What Are Withholding Allowances?
Withholding allowances were exemptions that employees used to use to claim from federal income tax, using Form W-4. Withholding allowances were used to determine an employee’s withholding tax amount on their paychecks. The more allowances an employee chooses to claim, the less federal tax their employer deducted from their pay.
What Is the Income Tax Return Rate for 2021?
Tax liability is incurred when you earn income. So when looking at your income tax returns, you need to check what income tax rate applies to you. Tax returns can be broken down into seven federal tax brackets.
These are:
- 10%
- 12%
- 22%
- 24%
- 32%
- 35%
- 37%
These are the rates for any taxes that are due in April 2022.
For a single filer, the income tax rate for 2021 would be as follows:
| Tax Rate | Taxable Income bracket | Tax Owed |
| 10% | $0 to $9,950 | 10% of taxable income |
| 12% | $9,951 to $40,525 | $995 plus 12% of the amount over $9,950 |
| 22% | $40,526 to $86,375 | $4,664 plus 22% of the amount over $40,525 |
| 24% | $86,376 to $164,925 | $14,751 plus 24% of the amount over $86,375 |
| 32% | $164,926 to $209,425 | $33,603 plus 32% of the amount over $164,925 |
| 35% | $209,426 to $523,600 | $47,843 plus 35% of the amount over $209,425 |
| 37% | $523,601 or more | $157,804.25 plus 37% of the amount over $523,600 |
And if you were looking ahead to 2022, the federal income tax brackets would look like this:
| Tax Rate | Taxable Income bracket | Tax Owed |
| 10% | $0 to $10,275 | 10% of taxable income |
| 12% | $10,276 to $41,775 | $1,027.50 plus 12% of the amount over $10,275 |
| 22% | $41,776 to $89,075 | $4,807.50 plus 22% of the amount over $41,775 |
| 24% | $89,076 to $170,050 | $15,213.50 plus 24% of the amount over $89,075 |
| 32% | $170,051 to $215,950 | $34,647.50 plus 32% of the amount over $170,050 |
| 35% | $215,951 to $539,900 | $49,335.50 plus 35% of the amount over $215,950 |
| 37% | $539,901 or more | $162,718 plus 37% of the amount over $539,900 |
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