Employers calculate the amount of taxes withheld from each paycheck by taking several factors into account, including the frequency of the payroll period, employee's marital status, amount of claimed exemptions and amount of the payment, according to BizFilings. The withholding includes federal and sometimes state and local taxes.
Withholding amounts are meant to approximate the real taxes that an employee owes at the end of the tax year, according to BizFilings. Because employees have different tax liabilities depending on their financial or personal circumstances, all employees must complete a W-4 form before beginning a job, which allows them to claim exemptions according to their specific situations. Employers then use this information as a guide for the amount of taxes they need to withhold from paychecks.
For federal withholding amounts, the Internal Revenue Service provides simple tables that inform employers of the amount to withhold, as Business Filings explains. The wage bracket table is the most commonly used of these tables, and there is a different one for five different types of payroll periods, ranging from daily to monthly payments. Using a combination of the employee's wage bracket and the number of exemptions claimed by an employee, an employer can find the exact tax rate to use for calculating the correct amount to withhold from each paycheck from these tables. The IRS website publishes up-to-date copies of the tables.