What Is Federal Withholding Tax?

As you grow your business and hire employees, you’ll need to know the different tax requirements laid out by state and federal governments. One of the most common types of tax is withholding tax. Learn what federal withholding tax is and how you should collect it. 

What Is a Withholding Tax? 

A withholding tax refers to money “withheld” from an employee’s paycheck and deposited directly to the federal government. By withholding the tax, there’s no risk of employees accidentally spending the money they owe. Workers never have access to that money, though the amount withheld is reported on their pay stubs. 

What Are Some Examples of Withholding Tax? 

The most common withholding taxes for employees are the Social Security and Medicare federal taxes paid with each paycheck. In 2020, a salaried or hourly employee will pay 7.65% in federal withholding taxes, with 6.20% going to Social Security and 1.45% to Medicare.  

What Happens When Taxes Are Withheld?

As an employer, you can withhold employee taxes to make it easier for your team members to pay their share into Social Security and Medicare. Most employers pay these withheld taxes directly after they are withheld. For example, if you pay your employees bi-monthly, then you would submit the withheld taxes to the IRS on payday. 

Employers are also responsible for paying into Social Security and Medicare. Your business also needs to contribute 7.65%. Together, your federal withholding tax contribution is 15.3%. 

How Can You Track Your Federal Withholding Tax?

The IRS has a tax withholding estimator that you can use to better understand what you pay in taxes throughout the year. This tool is particularly useful if you’re a self-employed individual who needs to pay both parts of federal taxes as both employee and employer.

One of the best ways to ensure you pay the right amount of federal withholding tax: keep organized books throughout the year. Try out an app like Lendio’s software, which is free for small business owners. Keep an eye on your payroll costs and expenses to make tax season stress-free.

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