HR Guide to Employee Income Tax

HR compliance is an ongoing process that requires time and keen attention to detail. It is especially important when reviewing your organization’s withholding compliance, to understand exactly what employee income taxes entail. Read on to learn everything you need to know about the process.

What is a Tax Withholding?

An income tax withholding is the amount of the federal income tax that’s withdrawn from an employee’s paycheck every pay period. This sum, which is withheld by employers, is dependent on two variables: 

1. An employee’s gross pay. Gross pay is the total wages that an employee receives before taxes and deductions are withheld. Gross pay, or gross salary, is typically indicated as the annual pay a worker will make in a given year. 

2. Additional information employees provide on Form W-4 during onboarding. Form W-4 is an IRS tax form that employees fill out so that employers can withhold the correct federal income tax from their wages when completing payroll. It is important that your employees know exactly how to fill out this form so that they can receive the correct return. 

Additionally, employee taxes might also be withheld from other forms of income, including pensions, bonuses, gambling winnings, and commissions. The IRS also indicates that in general, foreign persons who receive U.S. source income are subjected to a tax of 30%, also known as a Non-Resident Alien withholding 

Are Employers Responsible for Withholding Employee Income Taxes?

According to the IRS, “employers are required by law to withhold employment taxes from their employees.” This includes federal income taxes as well as Social Security and Medicare taxes, otherwise known as FICA taxes. 

The Federal Insurance Contributions Act (FICA)—a federal payroll tax—requires employers to withhold three separate taxes from the wages that are paid to employees. FICA is comprised of the following taxes:

• A 6.2% Social Security tax

• A 1.45% Medicare tax (the “regular” Medicare tax)

• A 0.9% Medicare surtax when the employee earns over $200,000

The law also requires employers to pay the organization’s portion of two of these taxes:

• A 6.2% Social Security tax

• A 1.45% Medicare tax

FICA and income taxes are required to be paid as they’re received (instead of one lump sum at the end of the year). With this in mind, employers that willfully refuse to comply with tax laws can face criminal and civil sanctions.

What Can HR Do to Help Employees with Income Tax Withholdings?

For many small businesses and organizations, HR is required to take on responsibilities that may not befall the HR departments of larger organizations. This can and often does include employment taxes. 

Consider taking the following steps to help your team with income tax withholdings:

1. Work with an accountant: Most organizations will need to have an accounting team review all tax-related information. Small businesses and organizations that lack a devoted team should at the very least work with an accountant to ensure all information is correct and up to date.

2. Learn the Process: One way you can better position yourself for handling employment taxes is to learn as much as you can about the processes involved. The IRS hosts resources that help small employers calculate withholdings, including the tax withholding assistant and the tax withholding estimator. The assistant can help employers to more easily calculate the federal income tax that is to be withheld from an employee’s paycheck. The estimator can help your employees to determine exactly how much should be withheld from their income each pay period. 

3. Invest in an HRIS: Some companies will use an automated payroll system, which calculates rates automatically. Often, an automated payroll system is included or integrated within a larger human resources information system (HRIS). An HRIS is a software that combines many different systems and processes to ensure the ease of HR management. Small businesses can use the right software solution for their team to efficiently and effectively centralize, organize, and improve their day-to-day processes. For organizations looking to automate their payroll systems, an all-encompassing HRIS system might be the answer. 

4. Understand the Parameters: Employees may ask you how much they should withhold or expect to have withheld. Know that you cannot advise employees on their W-4 responses but that you can explain wage thresholds, base withholding amounts, and other basic information about how W-4s are completed. 

5. Be Prepared for Everything Else: What if employees live in multiple states, or your organization operates in different states? Is your business an LLC or a corporation? These are important questions you will need to ask to determine your tax requirements and needs. Research your state’s requirements and whether or not you will need to abide by multiple state requirements. This is yet another area where an HRIS system would provide support to your employees and your HR department. 

Additional Resources

You can also stay informed, educated, and up-to-date with employee income taxes and other important topics by using BerniePortal’s comprehensive resources:

• BerniePortal Blog—a one-stop-shop for HR industry news

• HR Glossary—featuring the most common HR terms, acronyms, and compliance

• HR Guides—essential pillars, covering an extensive list of comprehensive HR topics

• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit

• HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics