When using the percentage method to determine federal income tax withholding the employer must perform the following steps:

  1. Determine the employee’s wages subject to federal income tax withholding (gross wages less any pre-tax deductions)
  2. Determine the payroll frequency and the allowance amount per IRS Publication 15 Table 5 page 37
  3. Determine the total allowance amount by multiplying the number of allowances claimed by the employee on Form W-4 by the allowance amount from Table 5
  4. Subtract the total allowance amount from total wages
  5. Using the tables provided by the IRS on pages 39-40 of Publication 15 to determine the appropriate federal income tax withholding
  6. Add any additional withholding requested by the employer on Form W-4
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