The two primary methods for computing the amount of federal income tax to withhold from an employee's wages are the wage bracket method and the percentage method. Both of these are discussed in depth in IRS Publication 15 (Circular E). Wage bracket tables contain withholding amounts for single and married employees for weekly, biweekly, semi-monthly, monthly, and daily or miscellaneous payroll periods. If an employer cannot use the wage bracket tables because wages exceed the amount shown in the last bracket of the table, the percentage method of withholding must be used. Wages should be reduced by the amount of total withholding allowances before using the percentage method tables.
The percentage method tables may also be used in lieu of the wage bracket tables. The percentage method tables contain formulas for single and married employees for weekly, biweekly, semi-monthly, monthly, daily or miscellaneous, quarterly, semi-annual, and annual payroll periods.
An employer may use whichever withholding method is best suited to his particular payroll situation. Factors in this decision would be:
- the number of employees
- the type of payroll system
- the type of payroll equipment on hand
An employer may change from one method to another at will and may use one method for one group of employees and another method for another group.