How to Withhold Using the Part-Year Employment Method
Author: Alice Gilman
An employer must withhold federal income taxes from its employees' pay every pay period. The IRS has developed several methods employers can use to fulfill this duty. The percentage method of withholding is most commonly used by employers with automated payroll systems and third-party payroll service providers. 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.
However, certain employees, such as those who start work in the middle of the year, or who work for only a short time during the year (e.g., college students working during the summer) may be overwithheld if their employer uses the regular percentage method tables without adjustment for the part-year nature of their jobs. These employees may request, in writing, that their employer use the part-year withholding method. An employee's written request must include the following elements:
- The last day of any employment during the calendar year with any prior employer;
- A statement that he or she uses the calendar year as his or her tax year; and
- A statement that he or she reasonably anticipates that he or she will be employed by all of his or her employers for a total of no more than 245 days in terms of all continuous employment during the current calendar year.
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, an 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.
Step 2: Determine the Total Wages for the Current Pay Period
An employer must add the wages to be paid to an employee for the current pay period to the total amount of wages paid to the employee for all the preceding pay periods during the same calendar year.
Step 3: Compute the Equivalent Number of Pay Periods
The equivalent number of pay periods is determined by adding the number of pay periods used in Step 2 to the number of pay periods between an employee's last employment and current employment. To find the number of pay periods between the employee's last day of prior employment (or the previous December 31, if later) and the first day of the employee's current employment, divide the number of calendar days between the employee's last day of prior employment and the first day of current employment by the number of calendar days in the current pay period.
George was laid off on May 25. On October 28, he takes what is anticipated to be an eight-week, part-time job with Acme, through December 23. Acme anticipates paying George $30,000. For the pay period ending November 11, George earns $1,800. Acme figures the equivalent number of pay periods by taking the following steps:
1. Pay period - October 29 to November 11
2. The equivalent number of pay periods for George's period of unemployment
Step 4: Compute the Average Wages Per Pay Period
To determine the average wages per pay period, an employer must divide the wages payable for the current pay period by the total number of equivalent pay periods.
To arrive at George's average wages per pay period, Acme divides $1,800 by 12, which equals $150.
Step 5: Calculate Withholding on the Average Wages Per Pay Period
Using the appropriate percentage method table, an employer must compute the tax that it would have been required to withhold if the employee had been paid his or her average wages for the number of payroll periods. To use the percentage method tables, an employer must take the following steps:
- 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.
George filed Form W-4 with Acme on which he claimed zero withholding allowances. Acme calculates the withholding on $150:
- Figure the total value of his withholding allowances: $0.
- Figure his taxable income for one biweekly pay period: $150 - $0 = $150.
- Figure withholding for a single employee for a biweekly pay period:
- Looking at the biweekly percentage method withholding table for single individuals, the appropriate wage bracket is over $88 but not over $447.
- The tax is $0.
- George's excess wages are $62 ($150 - $88).
- Multiply $62 by 10%, which equals $6.20.
Step 6: Calculate Total Withholding for the Total Number of Pay Periods
To determine total withholding for the total pay periods, an employer must multiply the amount withheld for the current pay period by the total number of pay periods, including equivalent pay periods.
To arrive at what would be George's cumulative withholding, Acme multiplies $6.20 by 12, which equals $74.40.
Step 7: Calculate Withholding for the Current Pay Period
To calculate withholding for the current pay period, an employer must subtract the result from Step 6 from the total tax already withheld. The excess is the amount to withhold for the current pay period. If taxes were not previously withheld, the amount to withhold for the current pay period is the amount from Step 6.
For the November 11 pay period, Acme has withheld $0. Acme must withhold $74.40 from George's current paycheck.