Federal Withholding on Wages for Income Tax, Medicare, and Social Security

Woman taking photo image on phone of a remote deposit while seated in a cafe
••• RyanJLane / Getty Images

Employers are required to subtract taxes from an employee's pay and remit them to the U.S. government in a process referred to as "federal income tax withholding." Employees can then claim a credit on their tax returns for the amounts that were already withheld and paid to the IRS. Employers are required to withhold federal income tax, Social Security tax, and Medicare tax from employees' earnings.

Key Takeaways

  • At least three taxes are withheld from wages: income tax, Social Security, and Medicare. Some taxpayers might be subject to withholding for the Additional Medicare Tax as well.
  • The information you enter on your Form W-4 and give to your employer determines how much will be withheld from your pay for income tax.
  • Social Security is withheld at a flat rate of 6.2% up to a certain limit, and Medicare is also withheld at a flat rate. Medicare takes 1.45% of your pay.
  • Having the wrong amount withheld can result in owing the IRS at tax time, but you can change your W-4 at any time to correct any mistakes.

Federal Income Tax Withholding

The amount of taxes that an employer must withhold and remit to the IRS depends on how much in the way of gross income you've earned in the form of wages for the year. Pre-tax deductions, such as retirement plan contributions, are subtracted first before withholding is based on the remaining balance.

Employers use the information included on Form W-4, completed by each of their employees, to figure the amount of federal income tax to withhold from each of their paychecks. The form details information such as your filing status, your number of dependents, and if you work multiple jobs.

How to Calculate Withholding on Form W-4

Withholding allowances used to correspond with the number of personal exemptions that taxpayers were entitled to claim on their tax returns for themselves, their spouses, and their dependents. But the Tax Cuts and Jobs Act (TCJA) eliminated personal exemptions from the tax code beginning in 2018 through at least 2025. The IRS rolled out a revised Form W-4 beginning with the 2020 tax year to accommodate this tax code change.

The form is much easier to complete than the prior version. It does much of the work for you. It's largely a matter of answering some questions. The form will provide you—or, more accurately, your employer—with the correct amount to be withheld from your pay based on your responses.

You can use the Tax Withholding Estimator on the IRS website if you're still feeling a bit confused when you're tackling your Form W-4.

Changing Your Withholding

You're not stuck forever with the withholding your employer arrived at when you first completed a Form W-4 or if you make errors on the revised form. You can change your W-4 at any time during the tax year to adjust for more or less withholding, depending on your circumstances. The IRS advises that you revise your form if:

  • You or your spouse pick up a second job or lose secondary sources of income.
  • You experience major life changes, such as marriage, divorce, death of a spouse, or the birth or adoption of a child.
  • You qualify for fewer—or more—tax deductions, credits, or adjustments to income.

It's also a good idea to review your withholding whenever there have been changes in the tax law, which has occurred numerous times since late 2017.

You Might Be Exempt From Withholding

A few individuals are exempt from withholding, so no federal income tax has to be withheld from their pay. This can happen because they owed no income tax in the prior tax year. They don't expect to owe income tax in the current year, either.

You can state that you're exempt on Form W-4 if you qualify, and you must do so if you don't want tax withheld. Your employer is still obligated to withhold from your pay otherwise. But bear in mind that you could owe a large lump sum when you file your return after the close of the tax year if your calculations are wrong and nothing has been withheld from your pay all year.

This rule applies only to income tax, not to FICA taxes—the Social Security and Medicare withholdings.

Social Security Withholding on Wages​

Wages are subject to other forms of withholding in addition to the federal income tax. The Social Security tax is withheld at a flat rate of 6.2% on gross wages after subtracting any pre-tax deductions that are exempt from Social Security taxation.

Not all gross wages are subject to this tax. An annual wage base limit caps earnings that are subject to withholding for Social Security at $147,000 in 2022, up from $142,800 in 2021. Income over this amount isn't subject to Social Security withholding.

The amount withheld is often equal to the amount of Social Security tax for which an employee is liable because the tax is assessed as a flat rate with a maximum cap on earnings. But there are some exceptions. Taxpayers can end up overpaying or underpaying through withholding.

Overpaid Social Security Tax

Employees who work for two or more employers might find that they've overpaid their Social Security taxes because their total wage income from all sources exceeds the annual Social Security wage base. One employer might not know about the earnings from another that can push your overall wages over the wage base limit, so they continue withholding even though they no longer have to.

Any overpaid Social Security tax can be refunded if you claim the excess as a tax credit when you file your return.

Underpaid Social Security Tax

Social Security taxes can be underpaid in three ways.

Underreported Tip Income

Some employees receive tips, but they don't report them to their employers, so no tax is withheld from this money. You should use Form 4137 to figure the amount of Social Security and Medicare tax due on unreported tips. Report this additional amount on your tax return.

Misclassification As an Independent Contractor

Some workers are incorrectly classified by their employers as independent contractors rather than as employees. Their earnings would not have any tax withheld in this case because independent contractors are responsible for remitting their own estimated taxes to the IRS as the year goes on, including income, Social Security, and Medicare taxes.

Use Form 8919 to arrive at the correct amount of Social Security and Medicare tax on your earnings in this case. Report this additional amount on your annual tax return.

Group Term Life Insurance

Some retirees might receive coverage under a group term life insurance policy from their former employer. This insurance is taxable if the policy value is over $50,000.

A retiree might not have any cash earnings associated with their retirement benefits from which an employer can withhold taxes for this purpose. Your Form W-2 will show the uncollected Social Security and Medicare tax using the codes M and N in box 12 in this case. You can then add these amounts to your return for the year.

Underpaid Medicare Tax

Medicare tax is withheld at the rate of 1.45% of gross wages after subtracting for any pre-tax deductions that are exempt, just as with Social Security. Medicare is assessed at this flat rate. There's no wage base, so the amount withheld is often equal to the amount for which an employee is liable.

But a 0.9% Medicare surtax has been in place for higher-income earners since 2013. This can cause under-withholding if you're subject to it. Earnings subject to this tax depend on your filing status. As of the 2021 and 2022 tax years, you must pay the surtax on earnings over:

  • $125,000 for married taxpayers who file separate returns
  • $200,000 for single taxpayers
  • $200,000 for heads of household
  • $200,000 for qualifying widow(er)s
  • $250,000 for married taxpayers who file joint returns

It's possible that some taxpayers might not have this additional amount withheld from their pay, so any additional Medicare tax that's due will be included on their tax returns. It would become due at that time.

Frequently Asked Questions (FAQs)

What is the federal tax withholding rate?

The federal withholding rate depends on your filing status and taxable income. Most taxpayers will have 6.2% withheld for Social Security, 1.45% for Medicare, and federal income taxes withheld from their taxable incomes. This is your income that remains after any pre-tax deductions are made.

Why is there no federal tax taken out of my paycheck?

It could be an error on the part of your employer if you haven't had any federal taxes withheld from your paychecks, or you may have filled out your W-4 incorrectly. Follow up with your employer quickly to avoid racking up an unexpected year-end tax bill.

What is the difference between federal and state taxes?

State taxes are collected by state tax agencies, and percentages, rates, and brackets vary by state. Some states collect no income tax at all. There's also no state-level tax for Medicare or Social Security because these are federal programs.

Article Sources