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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 provides 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. The percentage method tables are issued before a calendar year ends for use by employers in the following year. The percentage method tables are published in IRS Publication 15-T, Federal Income Tax Withholding Methods.

As of January 1, 2020, the new version of IRS Form W-4, Worksheet 1 and accompanying percentage method tables are intended to be used with automated payroll systems (although they may also be used with manual payroll systems). They may be used with both pre-2020 versions of Form W-4 and 2020 or later versions of the form.

Note: There are two additional worksheets and percentage method withholding tables:

  • Worksheet 4, Employer's Withholding Worksheet for Percentage Method Tables for Manual Payroll Systems With Forms W-4 From 2020 or Later; and
  • Worksheet 5, Employer's Withholding Worksheet for Percentage Method Tables for Manual Payroll Systems With Forms W-4 From 2019 or Earlier.

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.

This How To explains how to use the percentage method tables in conjunction with Worksheet 1 to determine withholding from the pay of an employee using the average estimated wages method.