Use these steps to figure the income tax to withhold under the percentage method.
Table 5. Percentage Method—2016 Amount for One Withholding Allowance
- Multiply one withholding allowance for your payroll period (see Table 5 below) by the number of allowances the employee claims.
- Subtract that amount from the employee's wages.
- Determine the amount to withhold from the appropriate table Link.
||One Withholding Allowance
|Daily or miscellaneous (each day of the payroll period)
Example. An unmarried employee is paid $800 weekly. This employee has in effect a Form W-4 claiming two withholding allowances. Using the percentage method, figure the income tax to withhold as follows:
Explanation for step 6:
||Total wage payment
||Allowances claimed on Form W-4
||Multiply line 2 by line 3
||Amount subject to withholding (subtract line 4 from line 1)
||Tax to be withheld on $644.20 from Table 1—single person, Table Link
Go to Table 1 (a) Single Person
$644.20 is OVER $222 BUT NOT OVER $767 so to compute amount to withhold
$17.90 plus $15% of Excess over $222
Computation: $17.90 + 15% (644.20-222) = $17.90 + 63.33 = $81.23
To figure the income tax to withhold, you may reduce the last digit of the wages to zero, or figure the wages to the nearest dollar.
Annual income tax withholding. Figure the income tax to withhold on annual wages under the Percentage Method for an annual payroll period. Then prorate the tax back to the payroll period.
A married person claims four withholding allowances. She is paid $1,000 a week. Multiply the weekly wages by 52 weeks to figure the annual wage of $52,000. Subtract $16,200 (the value of four withholding allowances for 2016) for a balance of $35,800. Using the table for the annual payroll period on page 45, $3,160.00 is withheld. Divide the annual tax by 52. The weekly income tax to withhold is $60.77.
If you don't want to use the wage bracket tables figure how much income tax to withhold, you can use a percentage computation based on Table 5
below and the appropriate rate table. This method works for any number of withholding allowances the employee claims and any amount of wages.
2016 Federal Tax Withholding Percentage Method Table
Alternative Methods of Income Tax Withholding
Rather than the Wage Bracket Method or Percentage Method described in this section, you can use an alternative method to withhold income tax. Pub. 15-A describes these alternative methods and contains:
• Formula tables for percentage method withholding (for automated payroll systems),
• Wage bracket percentage method tables (for automated payroll systems), and
• Combined income, social security, and Medicare tax withholding tables.
Some of the alternative methods explained in Pub. 15-A are annualized wages, average estimated wages, cumulative wages, and part-year employment.
Supplemental wages identified separately from regular wages.
If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages.
- If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages.
- Withhold a flat 25% (no other percentage allowed).
- If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
- If you didn't withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages.
Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.
Example 1. You pay John Peters a base salary on the 1st of each month. He is single and claims one withholding allowance. In January he is paid $1,000. Using the wage bracket tables, you withhold $50 from this amount. In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and don't separately identify. You figure the withholding based on the total of $3,000. The correct withholding from the tables is $336.
You pay Sharon Warren a base salary on the 1st of each month. She is single and claims one allowance. Her May 1 pay is $2,000. Using the wage bracket tables, you withhold $186. On May 14 she receives a bonus of $1,000. Electing to use supplemental wage withholding method 1-b, you:
- Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000).
- Determine the amount of withholding on the combined $3,000 amount to be $336 using the wage bracket tables.
- Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($336 – $186 = $150).
- Withhold $150 from the bonus payment.
Example 3. The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. You withhold 25% of $1,000, or $250, from Sharon's bonus payment.
The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Using supplemental wage withholding method 1-b, you:
- Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000).
- Determine the amount of withholding on the combined $5,000 amount to be $771 using the wage bracket tables.
- Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($771 – $186 – $150 = $435).
- Withhold $435 from the second bonus payment.
Vacation pay is subject to withholding as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it.
How to Calculate Federal & State Taxes for Gross-Up Purposes
When you reimburse an employee for moving expenses or give your employee a bonus, you can "gross up" the amount to cover the tax burden. Because the IRS considers bonuses and reimbursement for moving expenses taxable income, the employee must pay taxes on the monetary gain. If you promise your employee a specific amount, it is your responsibility to cover the tax liability by "grossing up" the payment. The gross-up amount should equal the amount the employee is owed plus enough money to cover the federal and state taxes associated with the tax liability.
Determine the employee's total tax rate by adding the federal and state tax percentages. Generally, you must use a supplemental tax percentage according to the employee's income tax bracket using the IRS Circular E and the tax form or publication pertaining to your state's income tax rules. For example, if the employee must pay 25 percent of his income to federal and state and subject to 7.65% FICA (6.2% OASDI+1.45%HI), the total tax on the bonus or reimbursement is 32.65 percent (25 + 7.65).
Subtract the total tax percentage from 100 percent to determine the net tax percentage. For example, assume that your employee must pay 31 percent on a $10,000 bonus. The net tax percentage is 67.35 percent (100 - 32.65).
Divide the employee's bonus amount by the net tax rate to determine the gross amount of the bonus. Using the previous example, the gross amount of the bonus, accounting for federal and state taxes due, is $14,847.81 ($10,000 / .6735).
Subtract the gross amount that you owe the employee from the agreed-upon bonus to determine the gross-up federal and state tax amount. Using the previous example, the gross-up amount for federal and state income taxes is $4,847.81 ($14,847.81 - $10,000).