There are two possible methods that employers and payroll companies can use to calculate FIT:
Percentage method
Wage bracket method
If you are curious about how the calculations are determined, follow along to learn how the software calculates federal income taxes.
Patriot uses the PERCENTAGE method for automated payroll systems. You can find the percentage method tax tables in IRS Publication 15-T.
Page 10 has a worksheet to calculate the taxable wages.
Page 12 contains the tax tables. We'll explain how these work soon, but note six separate tables are used, depending on the following variables:
The employee's tax filing status as indicated on their Form W-4 (married filing jointly, single or married filing separately, or head of household).
Whether the employee checked the box for two jobs in Step 2 of their new W-4 form (note the three tables in the right column are only used if they have checked the box in Step 2). If they used the 2019 earlier W-4 form or if the box in Step 2 is unchecked, use the three tables on the left.
Also, notice in the table that if the employee's wages are low enough, no federal income tax will be withheld
Now, let's look at some examples of how to figure out federal income tax withholding. This will require some math, so grab a pencil and your thinking cap!
Let's say we have an employee with the following:
Paid biweekly
No pre-tax deductions (e.g., 401(k) or health insurance)
Using a 2020 or later Form W-4
Single
No other jobs (didn't mark the box in Step 2 of the W-4)
No dependents (nothing in Step 3 of W-4)
No other adjustments (nothing in Step 4 of W-4)
Step 1: Figure the Adjusted Wages
To get the adjusted annual wage amount, let's look at this worksheet. Remember to use Worksheet 1A on page 10 of IRS Pub 15-T.
The biweekly wages are $3,000 (Line 1a)
Multiply $3,000 by 26 pays for biweekly (Line 1b) to get the annual wages of $78,000 (Line 1c)
If Step 2 box is unchecked and the employee is single, enter $8,600 to reduce annual wages (Line 1g).
$78,000 – $8,600 = $69,400 (Line 1i) — the adjusted annual wage amount.
STEP 2: FIGURE THE TAX WITHHOLDING AMOUNT
Using the tax table on page 12 of IRS Pub 15-T, find the row for $69,400 in the Single/MFS table (Step 2 unchecked).
Column C: at least $5,426 in FIT for the year.
22% (Column D) on earnings over $53,150: $69,400 – $53,150 = $16,250 × 22% = $3,575
Total annual FIT: $5,426 + $3,575 = $9,001
Per check (biweekly): $9,001 / 26 = $346.19
STEP 3: DEPENDENTS AND OTHER CREDITS
Dependents and other credits reduce the actual tax owed (not taxable wages). If the employee had two dependent children ($2,000 × 2 = $4,000), divide by 26 pay periods = $153.85 reduction per check. New FIT: $346.19 – $153.85 = $192.34.
STEP 4: ADDITIONAL FIT WITHHOLDING
Any additional withholding from Step 4c of the W-4 is added directly to the FIT per pay amount. Example: $192.34 + $20.00 extra = $212.34.
LOW WAGE EXAMPLE: NO FEDERAL TAX DEDUCTED
For a married filing jointly employee paid biweekly at $800, the adjusted annual wage would be $7,900 ($800 × 26 – $12,900). Because $7,900 falls between $0 and $16,300 in the tax table, this employee owes no federal income tax on this check.
Summary
Patriot uses the percentage method to calculate FIT
Employees may not have FIT withheld if they do not make a certain amount
There are two versions of the W-4 form that an employee may have completed
How the employee completes the form determines exactly how much FIT is withheld
Not using Patriot Payroll Software yet? Why not try it free and save yourself time and brainpower?