What Is the Percentage Method for Tax Withholding?

The percentage method for tax withholding is the IRS formula employers use to calculate federal income tax on each paycheck by annualizing the employee’s wages, running them through the graduated tax rates, and dividing the result back down to a single pay period. Federal law requires every employer paying wages to withhold using the tables or computational procedures the IRS prescribes.¹ For 2026, the rates run from 10% to 37% across seven brackets.²

Why This Method and Not the Wage Bracket Tables

Publication 15-T gives employers two ways to figure withholding. The wage bracket method is a lookup table: find the row for the wage range, read across to the filing status, and the withholding is there. It’s faster by hand, but the tables only go up to a certain wage ceiling. Once an employee’s adjusted wages exceed the last row, the wage bracket method simply stops working.³

The percentage method has no such ceiling. Because it’s a formula rather than a finite chart, it handles any income level, which is why automated payroll systems use it as the default.⁴ If any employee earns above the table limits, or if you’re building payroll software, this is the method you need.

What You Need Before You Calculate

Everything starts with the employee’s Form W-4. For a 2020 or later form, three pieces matter:⁵

Filing status from Step 1c: single, married filing jointly, or head of household. This selects the rate schedule and the built-in deduction.
The Step 2 box for multiple jobs or a working spouse. Checking it removes the built-in deduction, which increases withholding to reflect combined household income.
Dollar amounts from Steps 3 and 4. Step 3 captures dependent credits ($2,200 per qualifying child under 17 and $500 per other dependent). Step 4 covers other income (4a), extra deductions above the standard deduction (4b), and any extra per-period withholding the employee wants (4c).

You also need the pay frequency, because weekly, biweekly, semimonthly, and monthly schedules each carry their own multiplier for annualizing wages and divisor for converting back.³ And you need the employee’s taxable gross wages for the period, after pre-tax deductions like 401(k) contributions and health insurance premiums.

Pre-2020 W-4s

Employees who submitted a W-4 before 2020 are not required to file a new one, and employers must keep withholding based on the older allowance system.⁶ For those employees, the percentage method uses a different adjustment: multiply allowances claimed by $4,300 per year and subtract that from annualized wages, in place of the Step 4(b) deduction and the filing-status add-on.⁴ The rest of the formula is the same.

Employees Claiming Exempt

An employee who had zero federal income tax liability last year and expects the same this year can claim exemption on the W-4 by checking the exemption box on Step 5 and completing only Steps 1(a), 1(b), and 5.⁵ The exemption expires each year. For 2026, a new W-4 must be submitted by February 16, 2027, or the employer must begin withholding as if the employee were single with no other adjustments.

The Four Stages of the Calculation

Publication 15-T walks through the formula in a worksheet (Worksheet 1A for automated systems). The logic has four stages for an employee on a 2020 or later W-4:⁴

Stage 1: Annualize and adjust the wages. Multiply the taxable wages for the pay period by the number of pay periods in the year. Add any Step 4(a) other income. Then subtract the Step 4(b) deduction and a built-in amount tied to filing status. If Step 2 is not checked, the built-in amount is $12,900 for married filing jointly and $8,600 for everyone else. If Step 2 is checked, it’s zero. The result is the Adjusted Annual Wage Amount.

Stage 2: Look up the tentative annual tax. Take the Adjusted Annual Wage Amount to the percentage method table for the employee’s filing status. Each row gives a base tax plus a rate applied to the amount above that row’s threshold. Add them for the tentative annual withholding.

Stage 3: Account for credits. Divide the Step 3 amount by the number of pay periods and subtract it from the per-period share of the tentative withholding. If the result is zero or negative, withholding for that period is zero.

Stage 4: Add any extra withholding. Add the Step 4(c) amount, if any. That final number is what you withhold from the paycheck.

A Worked Example

Take a single employee paid biweekly (26 periods) with $3,000 in taxable wages this period and nothing entered in Steps 2, 3, or 4.

Annualize: $3,000 × 26 = $78,000. No Step 4(a) income to add. Subtract the built-in deduction: Step 2 is unchecked and the employee is single, so it’s $8,600. Adjusted Annual Wage: $78,000 − $8,600 = $69,400.

Look up $69,400 in the 2026 percentage method table for Single or Married Filing Separately. It falls in the $57,900 to $113,200 bracket, showing a base tax of $5,800 plus 22% of the amount over $57,900.³ So $69,400 − $57,900 = $11,500, times 22% = $2,530. Add the base: $5,800 + $2,530 = $8,330 in tentative annual withholding.

Divide by 26: $8,330 ÷ 26 = $320.38. No Step 3 credits and no extra withholding, so the employer withholds $320 from this paycheck (rounded to the nearest dollar).

2026 Brackets and the Standard Deduction

The percentage method tables in Publication 15-T bake the standard deduction into their bracket thresholds, so you don’t subtract it separately. The underlying figures are still useful for checking your math. For 2026, the standard deduction is $16,100 for single filers and married filing separately, $32,200 for married filing jointly, and $24,150 for head of household.²

The seven 2026 rates on taxable income:²

10% up to $12,400 single, $24,800 married filing jointly
12% from $12,400 to $50,400 single, $24,800 to $100,800 jointly
22% from $50,400 to $105,700 single, $100,800 to $211,400 jointly
24% from $105,700 to $201,775 single, $211,400 to $403,550 jointly
32% from $201,775 to $256,225 single, $403,550 to $512,450 jointly
35% from $256,225 to $640,600 single, $512,450 to $768,700 jointly
37% over $640,600 single, over $768,700 jointly

Those are the return-side rates. The withholding tables in Publication 15-T translate them into per-paycheck thresholds that already include the built-in deduction, which is why the bracket boundaries in the withholding tables don’t match the ones above.

Rounding

The IRS allows rounding the withheld amount to the nearest whole dollar: drop anything under 50 cents, and round 50 cents or more up. Wages themselves can also be rounded to the nearest dollar before the calculation. Whichever choice you make, apply it consistently across employees and pay periods.³

Bonuses, Commissions, and Other Supplemental Wages

Bonuses, commissions, overtime, and similar payments are supplemental wages and follow their own rules. If total supplemental wages to an employee for the calendar year are $1 million or less, the employer can withhold a flat 22% instead of running the full percentage method.⁷ That flat rate is available so long as the employer withheld income tax from the employee’s regular wages at some point in the current or prior calendar year.

Once supplemental wages to a single employee cross $1 million in a calendar year, the portion above $1 million is subject to mandatory 37% withholding regardless of what the W-4 says.⁸ The employer can apply the 37% rate only to the excess, or to the entire supplemental payment that pushed the total past the threshold.

An employer can also skip the flat rate and combine supplemental wages with regular wages for the pay period, running the full percentage method on the total. That sometimes produces lower withholding when the employee’s effective rate is well below 22%.

When the IRS Overrides the W-4

If the IRS decides an employee’s withholding is too low, it sends the employer a lock-in letter specifying the withholding arrangement to use. You must give a copy to the employee and start withholding under the letter’s terms by the date it specifies, which is no sooner than 60 calendar days after the letter date for employees on a 2020 or later W-4.⁹

Once the lock-in takes effect, you cannot reduce withholding based on a new W-4 from the employee unless the IRS approves the change. The employee’s only recourse is to work directly with the IRS. If the employee no longer works for you when the letter arrives, no action is needed, but if they return within 12 months, the lock-in terms apply at that point.

What This Article Does Not Cover

The percentage method described here is the federal calculation for regular wages. It’s not the same procedure used for periodic pension payments on Form W-4P or nonperiodic retirement distributions on Form W-4R, which have their own default rates.¹⁰ And it doesn’t cover state income tax withholding, which most states with an income tax require you to compute separately from the federal figure. Running the federal percentage method correctly does not satisfy state obligations.

1
Office of the Law Revision Counsel. 26 U.S. Code 3402 – Income Tax Collected at Source
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Publication 15-T, Federal Income Tax Withholding Methods (2026)
4
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
5
Internal Revenue Service. Form W-4 (2026)
6
Internal Revenue Service. FAQs on the 2020 Form W-4
7
Internal Revenue Service. Publication 15 (Circular E), Employer’s Tax Guide
8
eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
9
Internal Revenue Service. Withholding Compliance Questions and Answers
10
Internal Revenue Service. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions