How Federal Income Tax (FIT) is Calculated
Step 1: Locate your W-4 Filing Status for Federal Income Tax Purposes. This can be retrieved from your most recent pay statement or from the employee self-service application. Make a note of your filing status (i.e., Married, Single, Head of Household) as well as the number of exemptions that you are claiming. Also note whether you have requested additional federal withholding dollars.
Step 2: Start with your gross pay for the pay period. Then, subtract all of your before-tax deductions. These are noted on your most recent pay statement. These will include medical, dental, and vision pre-tax deductions, parking, retirement contributions, and flexible spending accounts for medical and dependent care.
If you are non-resident alien, you must add an additional amount prior to calculating your tax. This amount can be found on page 22 of IRS publications. For bi-weekly paid employees, add $301.90. For monthly paid employees, add $654.20.
Step 3: Since the federal income tax withholding tables are annualized, take the result from Step 2, above, and multiply by 12 if you are paid monthly or by 26 if you are paid on a biweekly basis.
Step 4: Multiply the number of exemptions that you are claiming by the exemption amount allowable for the calendar year. For 2018, the exemption amount is $4,150.00. For example, if you are claiming three (3) exemptions, your exemption amount is $12,450.00.
Step 5: Subtract your exemption amount from Step 4 from the net wages calculated in Step 3. This will give you the annualized taxable wages.
Step 6: Access the 2018 Federal Income Tax withholding tables. These can be found on the IRS web site in Circular E, Publication 15. The annualized withholding tables are located on page 47, Table 7. Circular E can be found here: http://www.irs.gov/pub/irs-pdf/p15.pdf
Step 7: Locate the appropriate table based on your filing status. Single and Head of Household filers will use the Single table. Use the net taxable wages calculated in Step 5, above, to calculate your annualized tax amount. The following example is based on a married filing status, paid monthly, and a net annualized taxable wages from Step 5 of $45,000:
- $45,000 falls into the range of the $30,600 to $88,950 tax bracket.
- $45,000 minus $30,600 = $14,400
- $14,400 multiplied by 12% = $1,728.00
- Add $1,728.00 to the base tax for this bracket which is $1,905.00 = $3,633.00
- Divide $3,633.00 by the number of pay periods based on your pay frequency. In this case, 12. $3,633.00 divided by 12 = $302.75
- Add any additional tax that you have requested to be withheld, if any. This would be your total Federal Income Tax withheld for this paycheck.