The federal government requires employers to take taxes out of their employees’ wages; this includes salaried employees and workers paid hourly. Federal tax deductions are mandatory, so your employer must withhold them. If you’re paid by the hour, you’ll notice a reduction in your hourly wages due to taxes withheld.
Your federal tax liabilities include federal income tax, Medicare tax and Social Security tax. Your employer does not withhold these taxes from your hourly wages if you’re exempt from them. The requirements for exempt status vary by tax. As of 2012, you are exempt from federal income tax if in the previous year you had a right to a full refund because you owed no federal income tax and in the present year you expect a full refund because you don’t anticipate owing any tax. Medicare and Social Security taxes have separate criteria for exemption. For example, you’re exempt from both taxes if you work for a school at which you’re also a regular student or if you’re a non-immigrant with a specific type of visa. Not many employees are exempt from federal taxes.
Upon hiring you, your employer is supposed to give you a W-4 form to complete. You include your filing status and number of allowances on the form; if you qualify for exemption from federal income tax, state this on the W-4. Your employer uses the W-4 and Internal Revenue Service Circular E tax tables to figure the amount of federal income tax to withhold from your paychecks. Social Security and Medicare taxes are taken out of your hourly wages at the flat percentages Congress sets each year.
Federal Income Tax Calculation
Let’s say you claim two allowances and married filing jointly status on your W-4. For the current biweekly pay period, you earn taxable hourly wages of $900, which includes overtime. According to page 44 of the 2012 Circular E, you pay $31 in federal income tax. If you earn minimal wages during the pay period or claim several allowances, it can result in you paying no federal income tax. This doesn’t mean you are exempt. It simply means you don’t have enough wages or have many allowances, which results in zero tax. If your hourly wages increase or if you reduce your allowances, you’ll likely owe tax.
Social Security and Medicare Calculations
As of 2012, your employer withholds Social Security tax at 4.2 percent of your taxable wages up to the annual wage limit of $110,100, and Medicare tax at 1.45 percent of all your taxable wages. For example, taxable biweekly wages of $900 multiplied by 0.042 comes to $37.80 in Social Security tax; $900 multiplied by 0.0145 amounts to $13.05 in Medicare tax.
If your employer failed to withhold federal taxes from your hourly wages, report the issue to the IRS; however, you are liable for any taxes due. If your employer withheld federal taxes but failed to pay them to the IRS on your behalf, report the matter to the agency. You employer can face civil and criminal penalties for failing to pay taxes withheld.
- IRS.gov: W-4 Form
- IRS.gov: Circular E, The Employer's Tax Guide
- McGraw-Hill: Determining Pay for Hourly Employees
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- IRS.gov: Persons Employed in U.S. Possessions - FICA
- IRS.gov: Employer and Employee Responsibilities - Employment Tax Enforcement
- Ryan McVay/Photodisc/Getty Images