Federal Income Tax Withholding (FITW): What it is and How it Affects your paycheck

Federal Income Tax Withholding (FITW) is a significant part of understanding small business payroll taxes. If you’re a small business owner, it’s essential to have a basic understanding of federal tax withholding, how to withhold it, and its purpose. Read on for more.

Table of Contents

• What is FITW?
• How much is Federal Income Tax?
• FIT taxable wages
• FIT withholding
• More help with FIT withholding and payroll

What is FITW?

Federal income tax withholding occurs on 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. Employers send withholding tax to the Internal Revenue Service (IRS) on employees’ behalf.

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

How much is Federal Income Tax?

Federal Income Tax is calculated based on an employee’s W-4 Form. Employers withhold FIT using either a percentage method, tax 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 paycheck 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 are 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 from FICA tax and FICA taxable wages.

FIT taxable wages for the purposes of FIT withholding and additional 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

Referencing the current IRS tables, a single employee making $500 per weekly paycheck may have $22 in federal income tax withheld per paycheck in 2024 if the employer uses the wage tax bracket method for standard withholding. Your employee’s withholding will show on their Form W-2 at tax time.

Related: Review the W-2 deadline.

Get guidance on FIT Withholding, tax calculations, and payroll management

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

Moreover, we offer additional small business services to support you further. Whether it’s taxes, bookkeeping, payroll, business entity formation, or compliance, our tax professionals and small business experts help you gain peace of mind about stressful back-end business responsibilities so you can get back to doing what you love.

Make a tax appointment.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.