Federal Income Tax Withholding: What It Means for Employers

What it means in practice

The federal income tax is pay-as-you-go, and for employees the main way it is paid during the year is withholding: the employer deducts it from pay and the amount is paid to the IRS in the employee's name (IRS Publication 505 (2026)). The Treasury regulation says the employer collects the tax by deducting it from wages "as and when paid, either actually or constructively," that legal responsibility stays with the employer even if a branch or representative handles the mechanics, and that the amount withheld is held in trust for the United States (26 CFR 31.3402(a)-1). This is separate from the employee share of Social Security and Medicare taxes, which are flat percentages covered under FICA and Social Security tax, and from taxes the employer pays from its own funds, covered under employer payroll taxes.

Who is covered. Withholding applies to wages paid to employees. Pub. 15 tells employers to withhold federal income tax from each wage payment according to the employee's Form W-4 and the correct table in Pub. 15-T. An independent contractor is not paid wages, so no income tax is withheld; the payments are reported on Form 1099, and the only federal withholding that can reach them is backup withholding (below). The Pub. 15 special-rules table makes some pay exempt unless employer and employee voluntarily agree to withhold, including domestic service in a private home, newspaper carriers under 18, and noncash pay for household or agricultural work.

What pay is subject. Pub. 15 says wages generally include all pay for services, in cash or other forms, such as salaries, vacation allowances, bonuses, commissions and taxable fringe benefits, however measured or paid. If wages are paid in property, such as stock, the employer still withholds and must pay the tax over in money (26 CFR 31.3402(a)-1(c)). Income tax withholding and FICA do not always match. Elective deferrals to a 401(k) plan are generally exempt from income tax withholding (subject to the section 402(g) limit) but taxable for Social Security and Medicare. Differential wage payments to employees on active military duty for more than 30 days are subject to income tax withholding but not Social Security, Medicare or FUTA tax. Amounts paid under an accountable expense plan are not wages. See pre-tax deduction for how deductions change the taxable base.

How an employer figures the amount. First, have a Form W-4 on file. The form's five steps, effective dates, exemption claims and invalid forms are covered on our Form W-4 page; an employee who gives no form is treated as Single or Married filing separately with no other entries. Second, determine taxable wages for the payroll period. Third, choose a method. Pub. 15-T (2026) has percentage method tables for automated payroll (Worksheet 1A) and wage bracket and percentage tables for manual payroll, with separate tables for Forms W-4 from 2019 or earlier. The wage bracket tables cover a limited amount of annual wages, generally less than $100,000; above the last bracket, the percentage method applies. Fourth, apply the form: Step 4(a) other income increases annual wages, Step 4(b) deductions reduce them, the Step 3 credit amount reduces the annual tax, and Step 4(c) adds a fixed extra amount each period. Pub. 15-T also allows rounding wages to the nearest dollar and the tax to the nearest whole dollar, if used consistently.

What changed for 2026. Pub. 15-T says the 2026 tables reflect P.L. 119-21, which made the individual tax rates and increased standard deduction permanent. Pub. 15 adds that employees may deduct up to $25,000 of qualified tips and up to $12,500 ($25,000 if married filing jointly) of qualified overtime for tax years 2025 through 2028, and employers must use an updated Form W-4 the employee submits so the benefit shows in each paycheck.

Payroll periods. Pub. 15 defines the payroll period as the period of service for which wages are usually paid, and says to withhold for that period even if the employee does not work all of it. With no regular payroll period, withhold as if wages were paid for a daily or miscellaneous period, counting the days, including Sundays and holidays, covered by the payment. The automated worksheet annualizes using 52 weekly, 26 biweekly, 24 semimonthly or 12 monthly periods (Pub. 15-T). See pay period.

Alternative methods. Pub. 15-T section 6 lists methods an employer may use instead: annualized wages; average estimated wages for a quarter (26 CFR 31.3402(h)(1)-1); cumulative wages, if the employee asks in writing, the employer agrees and the employee has been paid on the same kind of payroll period since the start of the year; and part-year employment, if the employee asks in writing under penalties of perjury and expects to work no more than 245 days in the year. Other methods are allowed if the tax withheld stays within set tolerances of the percentage method.

Nonresident alien employees. Because nonresident aliens cannot claim the standard deduction, Pub. 15 requires employers to add an amount to their wages solely to figure income tax withholding. For a 2020 or later Form W-4, the 2026 amounts are $309.60 weekly, $619.20 biweekly, $670.80 semimonthly, $1,341.70 monthly and $16,100 annually (Pub. 15-T, Table 2). The amount is not included in any box of Form W-2 and does not change the employee's tax liability or Social Security, Medicare or FUTA tax. Nonresident aliens may not claim exemption on Form W-4 and must request withholding as single; a treaty exemption is claimed on Form 8233.

Bonuses and other supplemental wages. Bonuses, commissions, severance and similar pay follow their own rules: an optional 22% flat rate when conditions are met, a mandatory 37% rate on supplemental wages over $1 million in a calendar year, or the aggregate method (Pub. 15 (2026), section 7). Pub. 15-T's methods cannot be used when either flat rate applies. The details are on our supplemental wages page.

IRS lock-in letters. The IRS may send a notice fixing an under-withheld employee's filing status and withholding; the core duties are on the Form W-4 page. Pub. 15 adds that the notice still applies to an employee not currently working if the employer pays wages for prior services, expects the employee back within 12 months, or the employee is on leave of up to 12 months, and applies again if the employee is rehired within 12 months of termination.

Backup withholding is different. Backup withholding is a flat 24% a payer must generally take from certain reportable payments, such as nonemployee compensation, interest, dividends, rents and royalties, when the payee does not furnish a correct taxpayer identification number (Pub. 15 (2026)); the IRS can also require it for underreported interest and dividends (IRS Topic 307). Pub. 15 states that backup withholding does not apply to wages. It is nonpayroll withholding, reported on Form 945 rather than Form 941 and deposited separately. For 2026 payments under sections 6041(a) and 6041A(a), P.L. 119-21 raised the aggregate reportable payment threshold from $600 to $2,000.

Depositing and reporting. Withheld income tax is deposited with Social Security and Medicare taxes on the monthly or semiweekly schedule explained on our federal tax deposit page. Each quarter, Form 941 reports wages, tips and other compensation on line 2 (amounts also included in box 1 of employees' Forms W-2) and the federal income tax withheld, or required to be withheld, on line 3. It is due April 30, July 31, October 31 and January 31, or by the 10th day of the second month after the quarter if all taxes were deposited on time (Instructions for Form 941). Each year the employer reconciles Forms 941 with Forms W-2 and W-3, and the employee claims the withholding shown on Form W-2 as a credit on the return.

Liability and corrections. An employer required to withhold is liable for the tax whether or not it collects it; if it withholds too little, it still owes the correct amount (26 CFR 31.3403-1). If the employee later pays the income tax, the unwithheld amount is not collected from the employer as well, but penalties and additions to tax for the failure still apply (26 CFR 31.3402(d)-1). Under Pub. 15, under-withheld income tax may be made up from later pay only by the last day of the calendar year, over-withheld tax must be repaid within the same year, and prior-year withholding can be adjusted on Form 941-X only for an administrative error, such as a transposition mistake, or where section 3509 applies. The employer stays responsible even if a payroll service fails to act.

Recordkeeping. Pub. 15 says to keep employment tax records for at least 4 years, including amounts and dates of wage payments, employee names, addresses and SSNs, copies of Forms W-4 and other withholding certificates, deposit dates and amounts, and copies of returns filed.

Where states differ. State income tax withholding is separate and follows each state's rules. Two examples, not a survey: the Pennsylvania Department of Revenue says employers withhold Pennsylvania personal income tax at a flat 3.07% of compensation from resident employees and from nonresidents working in the state. The Illinois Department of Revenue lists a 4.95% withholding rate applied based on the allowances an employee claims on Form IL-W-4, a state certificate that still uses allowances, and says an employee who claimed exemption on the federal Form W-4 may still need Illinois tax withheld. Other states differ; check your state revenue agency.

Questions employers ask. Can an employee ask us to withhold a flat percentage? No. Pub. 15 says withholding must rest on filing status, income, deductions and credits, though an employee may add an extra dollar amount per period. Must we honor a request for extra withholding? Yes, to the extent pay remains after other withholding required by federal, state and local law (26 CFR 31.3402(i)-1). Can we accept a payment from an employee to cover tax? Pub. 15 says not to accept payments beyond Form W-4 withholding, except funds tipped employees provide for tax on tips. Can we refund tax withheld because the form left out credits? No; Pub. 505 says the employee claims it on the return.

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