The Tax Policy Center notes that Social Security and Medicare payroll taxes contributed to 34 percent of federal earnings in 2007. Federal employee payroll tax withholding includes those two taxes and federal income tax. All employees are required to pay these taxes, unless they qualify for exempt status. The employee pays these taxes through payroll withholding; that is, the employer makes the deduction from their paychecks. If you want to know what your federal tax withholding will be each pay period, specific methods apply to each tax.
Refer to your Employee Withholding Allowance Certificate (Form W-4) for your filing status and number of exemptions, if you do not know it. Specifically, Line 3 has your filing status and Line 5 has your number of exemptions. Then, ask your employer for a copy of the respective Internal Revenue Service Circular E or retrieve it online. The Circular E lists your federal income tax withholding based on your pay period.
Apply the Circular E's wage bracket method to determine federal income tax. This method is best if you have fewer than 10 exemptions and if your earnings do not exceed the income limit. Suppose your earnings for 2010 are $700 per week and you claim marriedm with three withholding allowances. Go to page 43 of the 2010 Circular E. Your weekly federal income tax withholding would be $24.
Apply the percentage method to determine federal income tax. You may use this method if you would prefer not to use the wage bracket method, if you have more than 10 allowances or if your wages exceed the wage bracket's limit. Suppose you earnings are $950 biweekly and you claim single and one withholding allowance.
For 2010, the weekly pay period amount for one withholding allowance was $70.19. To arrive at the biweekly amount, calculate as follows: $70.19 x 2 weeks = $140.38.
Withholding allowance calculation: $950, biweekly pay - $140.38 = $809.62 (see page 37 of the 2010 Circular E). Then, see page 39. Look at the "Biweekly Payroll Period." You are not taxed on the entire remaining amount, only on the amount exceeding $401. Therefore, subtract $401 from $809.62 to arrive at the excess amount subject to taxation. Then, apply the percentage amount of 15 percent and flat dollar amount of $16.80 relevant to this taxable bracket. Federal income tax calculation: $809 - $401 = $408.62 + 15 percent = $61.29 + $16.80 = $78.09, biweekly federal income tax withholding.
Determine Social Security tax at 6.2 percent of all your gross earnings, up to $106,800 annually. Say you earn $1,000 biweekly. Calculation: $1,000 x .062 = $62, biweekly withholding. Once you reach the yearly max of $106,800 in wages, no more Social Security deductions should occur for the year.
Figure Medicare tax at 1.45 percent of all your gross pay. Say you earn $4,000 monthly. Calculation: $4,000 x .0145 = $58, monthly withholding.