There are three ways of calculating the amount of federal income taxes owed: the percentage method, the wage bracket method and the supplemental method, according to Intuit. Employers are required to withhold approximated federal taxes from their employee payments and may be penalized for under-withholding.
The percentage method is the most flexible of the methods for calculating how much federal tax to withhold, and it is commonly used by employers with automated payroll systems or employers that use payroll service providers, reports Intuit. Although this method involves more complex calculations than the wage bracket method, it allows for the computation of tax withholding involving more uncommon pay periods and for amounts that exceed the computations in the wage bracket tables. The wage bracket tables, on the other hand, are easier to use and are commonly employed by smaller businesses that use non-computerized payroll methods and issue manual payroll checks.
Employers use the supplemental method for calculating the amount of income tax to withhold for payments that are not considered regular wages, such as bonuses or commissions, Intuit explains. As of 2013, the withholding rates for such supplemental payments have been 25 percent for amounts under $1 million and 39.6 percent for amounts over this limit. Tables to use for all of these methods are available at the Internal Revenue Service website.