Payroll 101: tax withholdings

Tags: General, Payroll, Tax

Overview

Tax withholdings are amounts that employers are required to deduct from an employee’s gross pay and remit directly to tax authorities. These withholdings are used to cover the employee’s anticipated tax liability for federal, state, and sometimes local taxes. Withholding taxes ensures that employees pay their taxes incrementally throughout the year, rather than in a lump sum when filing their tax returns.

⚠️ Tax withholdings are generally required by law and are mandatory for most employees. Employers are responsible for deducting these taxes from employees' wages and remitting them to the appropriate tax authorities. Failure to withhold and remit taxes properly can result in penalties for the employer and possible underpayment of taxes by the employee.

Tax withholdings

• Federal Income Tax: Based on the employee’s W-4 form, this deduction is used to pay federal income taxes.
• State and Local Taxes: Depending on the employee’s state and local tax jurisdictions, these deductions cover state and local income taxes.
• Social Security Tax (FICA): A federal tax that funds Social Security benefits, shared between employees and employers.
• Medicare Tax (FICA): A federal tax used to fund Medicare, also shared between employees and employers.
• State Unemployment Tax (if applicable): In some states, employees may also contribute to state unemployment insurance.
• Local Income Tax: Withheld in certain jurisdictions.

Impact on paychecks

Tax withholdings are deducted from gross wages—that is, the total earnings before any deductions are applied.

👉 Some employees, such as certain independent contractors, may not have tax withholdings, as they are responsible for paying estimated taxes directly.