How Federal tax is calculated for whithholding from paycheck?

Question

I couple of related questions:

1- Is there a formula that is used to calculate federal tax that is going to be whithheld from every paycheck? I understand it is based on W-4 form enteries, frequency of the paycheck (weekly, biweekly etc) and the tax bracket related to the taxable income but can someone please tell me what that formula is in terms of math denotation/expression? e.g. tax to be withheld = a x b/xy where a, b, x, y are various variables and what those variables are.

2- When Fed tax is withheld, is it withheld against the gross income for that period or the gross income minus FICA (ss and medicare tax) and/or medical health insurance premium? I understand that in case of 401k contributions, gross income minus 401k contribution = taxable income, which is then used to calculate FICA and so on. Similiarly, is state tax withheld against the gross income or gross income minus fica minus fed tax?

Thanks in advance.

Answer 1

Employers use IRS Pub 15 to calculate withholdings. You can get a copy at the IRS website.

FICA is a flat 7.65% of gross income. 401(k) contributons are NOT exempt from FICA although income for income tax purposes is.

Federal income taxes are withheld from gross income after deducting pre-tax decuctions for retirement plans, health insurance, or pre-tax cafe plans. FICA is NOT deducted from gross income to calculate income tax withholding.

State taxes are withheld based upon gross wages just like Federal income taxes are. Some states allow a deduction for FICA and some do not so state law will determine if FICA is subtracted from your wages before the withholding is calculated.

Answer 2

1. There is no algebraic formula. It is a table lookup.

2. Withholding is based on gross income before SS and Medicare deductions. If there are pre-tax deductions for health insurance, they are not part of gross income, so they do not figure into withholding. Pre-tax 401k contributions also do not figure into withholding.

Also related to your second question:

SS and Medicare are paid on employee 401k contributions, those contributions are not subtracted before FICA is computed.

State tax withholding varies, some states tax 401k contributions and some don't. Some subtract federal income taxes.

Answer 3

Federal tax is withheld against income after pre-tax items like 401K contributions or health insurance are deducted. FICA is not subtracted.

See http://www.irs.gov/pub/irs-pdf/p15_06.pdf for the calculations for deductions, starting on page 36.

Answer 4

As an employer you should've received information alongside the forms that contain charts detailing the exact percentages to be withheld based on income / deductions / etc...

As for a formula, it is gross - %, and perhaps one allows certain deductions but as a rule it is almost always the gross that is used to calculate, FICA is social security and can not be used as a deduction.

Either way, you can order the information or possibly browse it online at http://www.irs.gov/