FIT tax: What it is and how it affects wages and withholding

A significant part of understanding payroll for small businesses is Federal Income Tax withholding (FIT). If you’re a small business owner, it’s essential to have a basic understanding of what it is, how to withhold it, and the purpose it serves. Read on for more insight…

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Employees who have Federal Income Tax (FIT tax) withholding on their paychecks.

What is FIT tax?

Federal income tax is withheld from each W-2 employee’s paychecks throughout a tax year. FIT tax pays for federal expenses like defense, education, transportation, energy, and interest on the federal debt.

There is also state income tax, or SIT, that goes towards state expenses and is another line item on your employees’ paychecks.

How much is FIT tax?

Federal Income Tax is calculated based on an employee’s W-4 Form. Employers withhold FIT using either a percentage method, bracket method, or alternative method. The percentage method is based on the graduated federal tax rates (0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37%) for individuals. The employee is responsible for this amount, and the FIT tax is drawn from each of their paychecks every pay period.

FIT tax is calculated using the following employee-related information:

  • ​Taxable income                                   
  • Pay frequency (such as weekly, biweekly, semimonthly, or monthly)                                                
  • Filing status
  • Number and type of dependents
  • Additional income, credits, tax deductions, and other withholding allowances requested on IRS Form W-4

If you already feel overwhelmed by these withholding tax topics, let us help. Our Block Advisors small business certified tax pros can help you with your small business payroll so you can get back to what you love.

FIT taxable wages

The amount an employee pays for FIT tax depends on their FIT taxable wages for the tax year. FIT taxable wages are different than FICA taxable wages.

FIT taxable wages for the purposes of FIT withholding and supplementary withholding include:

  • Bonuses
  • Salaries
  • Tips
  • Prizes and awards given to employees
  • Other taxable compensation and benefits

Some employee benefits are typically not included in wages subject to FIT withholding, such as employer-provided health insurance coverage.

Federal Income Tax withholding: How to calculate

You should calculate an employee’s federal income tax withholding with their W-4 Form. The amount of FIT tax withholding will vary from employee to employee.

Federal Income Tax example calculation

A single employee making $500 per weekly paycheck may have $27 in federal income tax withheld per paycheck in 2021 if the employer uses the wage bracket method for standard withholding. At tax time, your employee’s withholding will show on their Form W-2.

Related: Review the W-2 deadline.

More help with FIT withholding, calculations, and payroll

FIT tax is withheld from an employee’s paycheck based on the amount of their federal taxable wages. While the task of figuring out FIT withholdings for your employees may seem tricky, with the help of Block Advisors payroll service or payroll software like Wave, your payroll to-dos just got easier.

And, what’s more, we offer additional small business services to support you further. Whether it’s taxesbookkeepingpayroll, business entity formation, or compliance, we can help you tackle your small business to-do list, so you can get back to doing what you love.

Make a tax appointment.

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