Employee Tax Information

Payroll taxes contributed to approximately $870 billion of federal revenue in 2007, according to the Tax Policy Center. Employers withhold payroll taxes from employees' paychecks based on the respective agency's regulations. The Internal Revenue Service (IRS) oversees federal payroll tax withholding, and the state revenue agency administrates state payroll tax withholding. The calculation for employee withholding varies by tax.

Types

• Federal payroll taxes are those the federal government regulates. This includes Medicare tax, Social Security tax, and federal income tax. The Federal Insurance Contributions Act mandates the collection of Social Security and Medicare taxes -- these taxes often show on the employee's pay stub as FICA. Most states charge state income tax, but the following do not: Alaska, Nevada, South Dakota, Texas, New Hampshire, Florida, Wyoming, Washington and Tennessee.

Form W-4

• The employer is required to give all new employees a W-4 form to complete. The employee's federal income tax withholding depends on her filing status and allowances, as stated on her W-4. The IRS permits the employee to claim certain allowances. Each allowance gives her a specific sum, which reduces her taxable income. The employee should claim only the allowances to which she is entitled. Claiming too many allowances can cause her to owe taxes when she files her tax return; claiming too few can result in her having to wait until she files her tax return to receive a refund. The IRS says the employer should withhold at single with zero allowances, if the employee fails to submit a W-4 form. Some states have their own withholding tax form, while others use the employee's W-4 for state withholding purposes.

Withholding Calculation

• The IRS sends employers it has on record a new Circular E each year. The Circular E has the federal withholding tax tables needed to determine federal income tax. The employer withholds the tax based on the tax table relevant to the employee's filing status, income, allowances, and pay period. It withholds Medicare tax at 1.45 percent of all gross wages; and Social Security tax at 6.2 percent of gross compensation, up to $106,800 annually. State income tax withholding depends on the state revenue agency's regulations. Some states charge a flat withholding percentage, while others use a withholding tax table system comparable to federal income tax withholding.

Reporting/Payment

• The employer reports employee federal taxes to the IRS, quarterly or annually. It makes tax deposits, semiweekly or annually. The employer performs annual reporting with the Social Security Administration via Form W-2. It gives the employee a copy of the W-2 to files his tax return.

Considerations

• On occasion, city or local income tax may apply to employees, such as New York City's income tax and Ohio's school district income tax. The employer withholds them based on the respective agency's tax rates. Employees who claim exempt on their federal or state income tax withholding form are not subject to the respective tax withholding. The employee can use the IRS's online withholding calculator to figure if she needs to submit a new W-4 form to her employer. The calculator helps her to avoid overpaying or underpaying federal income tax.