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Understanding Payroll Tax Withholding

Payroll tax withholding is when an employer holds a portion of an employee’s gross wages for taxes. The amount withheld is based upon the information the employee puts on their IRS Form W-4. The IRS, Social Security Administration, state and locality (if applicable) all require payroll tax withholding. 

Federal state and local taxes are withheld from each paycheck in order to reduce the amount of money owed by the employee at the end of the year. If the total amount withheld for the year is more than what the employee owes, the employee receives a tax refund. If the total amount withheld is less than what the employee owes, then the employee will have a tax liability due when they file their taxes. For this reason, it is important for the employee to consider carefully how many dependents they should claim on their IRS Form W-4.

Typical payroll employee payroll tax withholding includes:

  1. Federal income tax (Varies based on the employee’s dependents, marital status, and Form W-4 adjustments.)
  2. Social Security tax (FICA tax)
  3. Medicare tax (FICA tax)
    • Unlike federal income tax, FICA tax is a standard percentage of an employee’s wages. Both employees and employers pay FICA taxes at the same rate.
  4. State income tax (if applicable)
  5. Local income tax (if applicable)

How to calculate payroll withholding tax

First, calculate the tax:

- As of 2021, Social Security tax is 6.2% and Medicare tax is 1.45% of an employee’s wages.

- Federal income tax (and, if applicable, state income tax) are based on the employee’s IRS Form W-4. Local income taxes can also have varying rates.

- Manually calculating payroll taxes can be time consuming and is subject to errors, especially if the employee’s wages and hours are inconsistent. To help calculate the tax, consider using our payroll services.

  1. Withhold the tax
    • Securely deposit the payroll tax liability in your business bank account
    • We recommend using a payroll service to handle the withheld taxes.
  2. Report the withheld tax
    • Report payroll tax withholdings to the IRS, SSA, your state and/or locality, and employees via the following forms...
    • IRS Form 941 or 944
    • IRS Form W-2 (employee, SSA, state, and locality)
  3. Deposit the tax to the appropriate agencies
    • Pay attention to federal, state, and local deposit deadlines to avoid penalties. 
    • Most agencies will require a deposit after every payroll through their online system.
  4. Maintain employee-related records
    • Pay rate
    • Hours worked
    • Gross wages
    • Taxes withheld
    • Net wages
  5. Maintain copies for your own records
    • IRS Form W-4
    • IRS Form W-2
    • IRS Forms 941 or 944
    • State and local-specific forms


The Giersch Group is an ADP Wholesaler, working together with the world's largest payroll company, the Giersch Group can ensure that your employee withholding taxes are done right every time. 



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