Federal Withholding for Income Tax, Medicare, and Social Security

Employers are required to subtract taxes from an employee's pay and remit that money 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 withheld and paid to the Internal Revenue Service (IRS). Employers are required to withhold federal income tax, Social Security tax, and Medicare tax from employees' earnings.

Federal Income Tax Withholding

The amount of taxes 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 tax withholding is calculated 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 whether you want more taxes withheld, such as to cover earnings from performing a side gig.

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. The IRS rolled out a revised Form W-4 in 2020 to accommodate this tax code change.

The form is much easier to complete than the prior version because it does much of the work for you. Completing it is largely a matter of simply 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.

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 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 tax law, which has occurred a few 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 any 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 if your calculations are wrong and nothing was withheld from your pay all year.

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, increasing to $160,200 in 2023. Income over this amount isn't subject to Social Security tax or 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 taxes 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's 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 should add these amounts to your return for the year.

Underpaid Medicare Tax

Medicare tax is withheld at a flat rate of 1.45% of gross wages after subtracting any pre-tax deductions that are exempt, just as with Social Security. There's no wage base for Medicare, 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. 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 should be included on their tax returns. It would become due at that time.

Frequently Asked Questions (FAQs)