To deduct withholding tax from employee paychecks, collect a signed Form W-4 from each worker, run their gross wages through the IRS calculation tables to find the federal income tax amount, apply flat percentages of 6.2% for Social Security and 1.45% for Medicare, subtract the total from the paycheck, and deposit the money with the federal government through EFTPS on the schedule the IRS has assigned you. The mechanics are the same every pay period. The mistakes that hurt employers most are timing mistakes on the deposit side, not math mistakes on the paycheck side.
The Three Taxes You Withhold
Every paycheck carries three separate federal deductions. Federal income tax comes out at a rate that depends on the employee’s earnings and what they wrote on their W-4.1Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source Social Security tax comes out at 6.2% of wages, and Medicare tax at 1.45%. These last two are together known as FICA.2Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
The employer owes a matching 6.2% and 1.45% out of its own funds on top of what it withholds, but that match is a company expense, not a paycheck deduction. Most states impose their own income tax withholding as well; roughly nine states have no state income tax at all. State rules run parallel to the federal ones and require separate registration and filing with the state agency.
Start With a W-4 From Every New Hire
Before you can calculate anything, you need a completed Form W-4, the Employee’s Withholding Certificate, from each new hire. The form tells you the employee’s filing status, whether they work multiple jobs, how many dependents they claim, and any extra dollar amount they want withheld each period.3Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Every one of those inputs flows into the withholding math, so an incomplete or stale W-4 produces a wrong deduction on every check.
Employees can hand you an updated W-4 any time, and you apply the change going forward. If someone never turns one in, withhold as though they are single with no adjustments, which produces the maximum federal income tax withholding.4Internal Revenue Service. Withholding Compliance Questions and Answers
How to Calculate Federal Income Tax Withholding
The IRS publishes two calculation methods in Publication 15-T, and you pick one for each pay period.5Internal Revenue Service. Publication 15-T Federal Income Tax Withholding Methods
The wage bracket method uses lookup tables organized by pay frequency (weekly, biweekly, semimonthly, monthly) and filing status. Find the row for the employee’s wage range, read across to their filing status, and the table gives you a dollar amount. This is the simpler option and it works for most straightforward payrolls.
The percentage method is a formula. You subtract an allowance amount from gross wages and apply a rate that steps up as income rises. Automated payroll software usually runs this method, and it handles wages that fall outside the range of the bracket tables. Both methods already bake in the standard deduction, and you have to use the current year’s version; last year’s tables will produce the wrong number as soon as new tables come out. Publication 15, sometimes called Circular E, sets the broader rules for translating W-4 entries into the inputs either method uses.6Internal Revenue Service. Publication 15, Employers Tax Guide
If the employee asked for extra withholding on their W-4, add that flat dollar amount to whatever the table or formula gave you. Table says $120, employee asked for $50 more, you withhold $170.
How to Calculate Social Security and Medicare Withholding
The FICA math ignores filing status and dependents. Multiply gross wages for the pay period by 6.2% for Social Security and by 1.45% for Medicare, and deduct both from the check along with the federal income tax amount.7Office of the Law Revision Counsel. 26 USC 3102 – Deduction of Tax From Wages
Two thresholds change the math partway through the year. Social Security tax applies only up to an annual wage cap; for 2026 the cap is $184,500. Once an employee’s year-to-date wages hit that figure, stop withholding the 6.2% Social Security portion on any wages above it.8Social Security Administration. Contribution and Benefit Base Medicare has no cap. Once an employee’s year-to-date wages cross $200,000, start withholding an Additional Medicare Tax of 0.9% on every dollar above that threshold, regardless of the employee’s filing status. Begin the extra withholding in the pay period that pushes them past $200,000 and continue through the end of the calendar year. The employer does not match the 0.9%.9Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
When and How to Deposit What You Withheld
The withheld money does not stay in your bank account. The IRS assigns every employer a monthly or semiweekly deposit schedule based on a lookback period. If your total employment tax liability during that window was $50,000 or less, you deposit monthly. More than $50,000 and you deposit semiweekly.6Internal Revenue Service. Publication 15, Employers Tax Guide
Monthly depositors deposit all employment taxes for wages paid during a month by the 15th of the following month. Semiweekly depositors deposit taxes for wages paid Wednesday through Friday by the following Wednesday, and taxes for wages paid Saturday through Tuesday by the following Friday.10Internal Revenue Service. Topic No. 757, Forms 941 and 944, Deposit Requirements A special rule overrides both: if you accumulate $100,000 or more in tax liability on any single day, the deposit is due the next business day.11Internal Revenue Service. Employment Tax Due Dates
Nearly all employers deposit through the Electronic Federal Tax Payment System, a free Treasury system.12Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System One detail catches new employers repeatedly: EFTPS payments must be scheduled by 8:00 p.m. Eastern Time the day before the due date. There is no same-day payment option, so logging in on the morning a deposit is due means it will already be late.13Electronic Federal Tax Payment System. Welcome to EFTPS
Reporting What You Withheld
Deductions and deposits get reconciled through required filings. Each quarter, most employers file Form 941, the Employer’s Quarterly Federal Tax Return, reporting total wages paid, federal income tax withheld, and both the employee and employer shares of Social Security and Medicare for the three-month period.14Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return The IRS matches Form 941 against the EFTPS deposits you already made. A shortfall means you owe the difference plus possible penalties. Very small employers whose total annual liability for federal income tax, Social Security, and Medicare withholding is $1,000 or less may qualify to file Form 944 once a year instead.15Internal Revenue Service. Instructions for Form 944
At year end, you prepare a Form W-2 for each employee showing annual wages and every tax withheld, and file the whole batch with the Social Security Administration under a Form W-3 transmittal.16Internal Revenue Service. About Form W-3, Transmittal of Wage and Tax Statements For tax year 2026, both furnishing W-2s to employees and filing them with the SSA are due February 1, 2027.17Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
Penalties If You Get It Wrong
The IRS treats withholding errors as more serious than ordinary tax mistakes because the employee has already “paid” this money by having it taken from wages. Deposit penalties climb sharply with lateness:
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- More than 10 days after an IRS notice demanding payment: 15%18Internal Revenue Service. Failure to Deposit Penalty
The tiers do not stack. A deposit 20 days late is penalized at 10%, not 2% plus 5% plus 10%.
The far worse consequence is the trust fund recovery penalty. Withheld taxes are held “in trust” for the government. If a business willfully fails to pay them over, the IRS can assess a penalty equal to 100% of the unpaid tax personally against any responsible individual: owners, officers, and even bookkeepers with check-signing authority.19Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax It is one of the few federal tax penalties that reaches through the corporate form to individuals, and in practice it is the penalty that ends small businesses.
Records to Keep
Keep every employment tax record for at least four years after you file the fourth-quarter return for the year. That includes each Form W-4, all pay records, EFTPS deposit receipts, and filed copies of Forms 941 and W-2.20Internal Revenue Service. Employment Tax Recordkeeping Under audit, these are the documents that prove you withheld correctly and deposited on time; without them, the burden of proving compliance falls back on you.
One boundary worth noting: none of the process above applies to independent contractors or other non-wage payees. Those payments have their own regime called backup withholding, which uses a flat 24% rate and Form W-9 rather than Form W-4.21Internal Revenue Service. Backup Withholding If you pay people who are not employees, treat that as a separate compliance track.