Instructions

1

Figure federal withholding. The employee's W-4 data (marital status and number of exemptions) determines how much federal tax is withheld per paycheck. The employer must also use the IRS Circular E for the tax year being computed to determine the federal tax. For example, if an employee is paid $700 weekly, his filing status is single and he has two dependents, based on the 2010 Circular E wage bracket method (see page 41), the federal tax to withhold is $63.

Note that the wage bracket method is designed for up to a specific amount of wages and allowances. Taxes on income and allowances in excess of the wage bracket method must be determined using the percentage method demonstrated on page 37 of the 2010 Circular E.
2

Determine state taxes, if applicable. Some states do not charge state income tax; therefore, contact your local workforce agency (department of labor) to see if state tax applies to you. If state taxes are applicable, find out the rate, which should be calculated based on your taxable income and your filing status. State taxes vary by state, so it is important that you contact your local workforce agency to know the requirements. Further, some cities and counties charge taxes, as well; find out if they apply to you.
3

Withhold Social Security tax. The Federal Insurance Contributions Act (FICA) regulates Social Security and Medicare taxes (see next Step). Determine Social Security tax based on the amount FICA has set for the year--6.2 percent for 2010. For example, if the employee earns $1,000 biweekly, calculate as follows:
1,000 x 6.2 percent = $62 (Social Security taxes to be withheld each pay period).

Social Security tax has an annual wage limit--$106,800 for 2010. Do not deduct any more tax for Social Security once the employee has reached the annual limit. Resume the withholding at the start of the next year.
4

Determine Medicare tax--1.45 percent for 2010. FICA has not imposed a wage limit on Medicare tax; therefore, all of an employee's wages is subject to Medicare tax.