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How to Withhold Using the Average Estimated Wages 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 for use by employers in the following year. The IRS publishes the percentage method tables in IRS Publication 15, Circular E, Employer's Tax Guide.

An employer has a duty to ensure that the proper amount of income tax is withheld from its employees' pay. This may be difficult for an employer that has employees whose pay varies from pay period to pay period (e.g., employees who receive overtime pay). Income tax withholding that is based on an estimate of an employee's quarterly income, with adjustments, can bring a certain level of uniformity to an employer's withholding procedures.