How to Use the Percentage Method Withholding Tables
Author: Alice Gilman
An employer must withhold federal income taxes from its employees' pay every pay period. The IRS has developed several methods an employer can use to fulfill this duty. The percentage method of withholding is most commonly used by an employer with an automated payroll system and third-party payroll service provider. An employer that cannot use the wage-bracket tables because its employees' wages exceed the upper bracket amounts may use the percentage method of withholding. This method works for any number of withholding allowances an employee claims and any amount of wages.
Separate tables apply for each pay period and the marital status of employees. The percentage method tables are issued before a calendar year ends and are to be used by employers in the following year. The IRS publishes the percentage method tables in IRS Publication 15, Circular E, Employer's Tax Guide.
Step 1: Determine the Value of the Employee's Withholding Allowances
Withholding allowances have dollar values that the IRS adjusts each year for inflation. Different withholding allowances apply to different pay periods. An employee may claim any number of withholding allowances, or none at all, on Form W-4.
To determine an employee's taxable wages, the employer must first multiply the value of one withholding allowance for the pay period by the number of allowances the employee has claimed on his or her Form W-4.
In 2017, Amy O'Connor, who is married and paid semimonthly, claims three withholding allowances on her Form W-4. The value of one withholding allowance for a semimonthly pay period in 2017 is $168.80. Therefore, the total value of Amy's withholding allowances is $506.40 ($168.80 × 3).
Step 2: Figure the Employee's Taxable Wages
Once the total value of an employee's withholding allowances is determined, that amount is subtracted from the employee's gross wages for the pay period. The result is the amount of wages that are subject to income tax withholding.
In 2017, Amy is paid $4,000 every semimonthly pay period. Amy's taxable wages are, therefore, $3,493.60 ($4,000 - $506.40).
Step 3: Apply the Appropriate Percentage Method Table to the Employee's Taxable Income
The percentage method tables are divided into pay periods and by marital status. For example, there are separate tables for single employees and married employees, and separate tables for weekly, biweekly, and semimonthly pay periods. Once an employer finds the correct table for the employer's pay period, the employee's marital status and taxable wages, the following steps apply.
- Find the appropriate taxable wage bracket on the left side of the table.
- Record the dollar amount of the tax to withhold.
- Subtract the amount of the employee's taxable wages that exceed the figure shown in the right hand column.
- Multiply this result by the appropriate percentage.
- Add the results from Steps 3 and 4 to arrive at the amount of income taxes to withhold from the employee's pay under the percentage method of withholding.
For 2017, Amy's withholding is $431.14, and is figured as follows:
- Looking at the semimonthly percentage method withholding table for married individuals, the appropriate wage bracket is over $1,138 but not over $3,523.
- The tax is $77.80.
- Amy's excess wages are $2,355.60 ($3,493.60 - $1,138).
- Multiply $2,355.60 by 15%, which equals $353.34.
- Add $77.80 and $353.34, which equals $431.14.