The Beginner's Guide to Federal Payroll Tax Withholding

If you are just starting out in your career or coming back after some time out of the workforce, one thing that all employed individuals must be aware of is payroll taxes. These taxes come in the form of Federal, State, Social Security, Medicare, and applicable local taxes, and will be deducted from each paycheck, affecting your net pay (also known as your ‘take-home’ pay.) In this article, we will focus on the federal tax withholdings for individual workers and arm you with the basic knowledge that can help you avoid any issues with the IRS down the line.

What is Federal Tax Withholding?

Every year, employers across the US are required to withhold money from each employee’s paycheck, sending the deduction to the federal government in the form of a payroll tax. Based on how much payroll tax is withheld from each paycheck will determine if the individual worker receives a refund or ends up owing more taxes when tax season rolls around. Understanding the process of how to calculate your federal tax withholdings, and planning accordingly, can make a big impact to your take home pay and your annual tax bill.

What Affects the Tax Withholding?

There are a number of factors that determine the amount of taxes that are calculated and withheld from a paycheck. The first factor is the W4: your personal information and your anticipated filing status. What you enter on the W4 is a big part of the tax withholding calculation. In addition to your filing status, other factors that you can include are: if you have dependents, your anticipated deductions, extra withholdings, and additional gig income.

The last two factors affecting tax withholding are gross pay and the frequency of pay. While most other industries are paid bi-weekly or semi-monthly, in the entertainment world frequency of pay is usually determined by a work week, or seven consecutive days with an exact to-the-hour beginning and end time, and will affect regular vs. overtime pay. For example, a work week for a production worker could start on Saturday night at 5pm, ending the following Saturday. If that person were to work 40 hours during the week and then be asked to work the following weekend, their pay on the second Saturday would be calculated with overtime, while the pay on Sunday would be considered part of a new work week, and therefor overtime would not apply.

Once you have the correct timeframe for the paycheck and the correct gross pay (the amount of earnings, including overtime), you are ready to calculate federal tax withholding!

Calculating Tax Withholdings

To calculate your tax withholding, you will need to use the federal tax tables, which are charts that determine the amount of tax applied to each portion of income, based on the factors we outlined above: pay frequency, filing status, and how you fill out the W-4.

The federal tax tables are created with the idea that each paycheck stands alone, as though each check represents one of the 52 weeks in a year. This works well if you have the same paycheck week to week for the whole year, but in the television, streaming and motion picture industry, it may result in over or under taxation if you are not aware of how the tables work.

A simple way to think of the formula is like this: A weekly paycheck is multiplied by 52 weeks and that total is applied to the annual tax table. The amount of taxes determined in the tax table are then divided by 52 weeks and that amount is applied to the individual check.

Because each paycheck stands alone, if your pay fluctuates, for example, you work overtime a few weeks each year, you will see the tax withholding fluctuate too. Additionally, if you work less than 52 weeks a year, because each paycheck stands alone and is taxed as if you do work 52 weeks a year, you may need to modify your withholdings periodically through the year, depending on your financial goals.

Taking Control of Your Taxes

The good news is that you can control your federal withholding taxes with the W4, adjusting to have more or less tax withheld from your paycheck, depending on your tax situation and your financial goals. If your goal is to receive a tax refund each year and you plan to use that money for savings, or maybe a family vacation, you need to make sure enough tax is being withheld from each paycheck.

On the other hand, if an unexpected bill arises and you need to cover the cost right away, you can adjust your withholdings in the opposite direction so that less money gets taken out of your weekly paycheck (however, it should be noted that this type of action may result in a tax bill once you file your return for the year). And if you want to break even and not owe or receive anything back during tax time, you can adjust for that too!

Since the W4 plays such a significant role in tax withholding calculations, it is important to fill it out correctly, and following the Tax Cuts and Jobs Act of 2017, the W4 has changed. To help our clients with filling out the new W4, we’ve assembled a handy guide: Guide to the New W4. And remember, EP will accept a new W4 any time! In addition to our guide, you can also visit the IRS’s tax withholding estimator, a calculation tool designed to help make sure your selections align with your financial goals. It even has a feature that allows you to plan around the amount of refund you’d like to receive at the end of the year! It is a good rule of thumb to check the tax withholding calculator a couple of times a year to make sure your goals are being met, and fill out a new W4 if you want to make adjustments to any of the upcoming pay cycles of the year.

Tax tables will change from year to year and will vary from state to state, so it is important to stay on top of your tax situation and adjust when needed. With the knowledge and resources you’ve gained today, you can be proactive and in control of your taxes, and avoid any unexpected surprises at tax time.

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