The IRS recently released changes to its income tax withholding tables for 2018 and 2022. If you regularly file your tax returns online, you can use the updated withholding tables by filing a new Form W-4 for this year. If you do not file electronically, you can still use the new withholding tables if you calculate your income tax using software or consulting services that use the new withholding tables. The new withholding tables are effective for tax years beginning after December 31, 2021. Use the new withholding tables to determine how much you should be withheld from your employees’ paychecks.
What Are Income Tax Withholding Tables?
Federal law requires employers to withhold income tax from most of their employees’ compensation. The federal withholding tables define the amount employers should withhold from worker wages for FIT (federal income tax).
The only exception is for certain independent contractors who work for non-profits, non-corporate entities, or small businesses. This is done through what’s known as a “gross wages” calculation. Employers are required to calculate the employee’s compensation by counting all the money they pay an employee and then apply a percentage to that number to arrive at the employee’s gross wages.
Federal income tax withholding is the amount of tax withheld from an employee’s wages each pay period. For most employees, withholding is set by the employer and reflects the amount owed for the employee’s gross income during the preceding tax year. The amount of tax withheld from an employee’s wages is used to pay the employee’s estimated income tax for the current year.
There are two ways for defining an employee’s federal income tax withholding:
- Percentage method
- Wage bracket method
2022 Income Tax Withholding Tables
As you may be aware, the Tax Cuts and Jobs Act of 2017 significantly reformed the US tax code, which affects nearly every American through changes to the income tax withholding tables. Some of the changes for specific types of income, including the new tax brackets, remain the same, but most changes are temporary until the Tax Cuts and Jobs Act is fully implemented.
However, there are a few parts of federal income tax withholding that are intact in 2022: They are:
- The supplemental tax rate is 22%
- The personal exemption is 0
- No withholding allowances on 2020 and later Forms W-4
- The backup withholding rate is 24%
- The optional computational bridge is still available
Final Words
These updates will help you file your tax returns on time and also reduce your chances of facing a penalty for under-withholding or over withholding. The IRS updates the W-4 and the withholding tables each year to ensure you’re taking advantage of the updates to the tax code. Take these recommended actions, and you will have no problems during tax season. Attend the Compliance Prime webinar to learn more about IRS Publication 15.
