2016 Federal Percentage Method Withholding Tables Released by IRS

Author: Rena Pirsos, XpertHR Legal Editor

December 8, 2015

The IRS has released advance copies of the federal percentage method withholding tables effective for wages paid in 2016. An employer may use the tables to determine the amount of income tax to withhold from an employee's pay in lieu of the wage bracket method withholding tables.

The withholding allowance amounts by payroll period have changed from the 2015 amounts. The wage amounts shown in the tables are net wages after total withholding allowances have been deducted.

The 2016 withholding allowance amounts by payroll period are as follows:

Employers using the percentage method tables may round the tax for the pay period to the nearest dollar, so long as rounding is used consistently. Withheld tax amounts should be rounded to the nearest dollar by dropping amounts under 50 cents and increasing amounts from 50 to 99 cents to the next higher dollar. For example, $2.30 becomes $2 and $2.50 becomes $3.

The percentage method is most commonly used by employers with automated payroll systems and third party payroll service providers. This method works for any number of withholding allowances and any amount of wages. Separate tables apply for each pay period and an employee's marital status.

Adjustment for Nonresident Aliens

A special procedure is used to compute the amount of income tax to withhold from the wages of nonresident alien employees performing services within the US. (Nonresident alien students and business apprentices from India are not subject to this procedure.)

The 2016 procedure is as follows:

• Step 1. Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period:

• Step 2. Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding.
  • Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the value of one withholding allowance for the appropriate payroll period.
  • Reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to determine the wages subject to income tax withholding.
  • Figure the income tax withholding using the percentage method tables. Alternatively, figure the income tax withholding using the 2016 wage bracket method tables.

Both the percentage method and wage bracket method tables will appear in the IRS's 2016 Publication 15 (Circular E), Employer's Tax Guide, which should be posted on the IRS website by the end of this month.

Supplemental Withholding Rates

The supplemental wages withholding rates are unchanged for 2016:

• Optional Flat Rate. 25% for supplemental wages up to and including $1 million.
• Mandatory Flat Rate. 39.6% for supplemental wages over $1 million.

An employer must withhold at these rates when making payments to employees that are in addition to their regular wages (e.g., overtime, commissions, bonuses, reported tips, back pay).

Backup Withholding Rate

The backup withholding rate is also unchanged for 2016. Payers of reportable payments to non-employee payees (i.e., independent contractors and other service providers who are not on the payroll as employees) must backup withhold 28% for federal income tax if the payee fails to provide a Taxpayer Identification Number (TIN) - either a Social Security Number (SSN), IRS Individual Taxpayer Identification Number (ITIN) or Employer Identification Number (EIN) - or provides one that is obviously incorrect.