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This article explains how Gusto calculates federal income tax (FIT) from employee paychecks and what factors affect the amount withheld.
How Gusto calculates FIT
Gusto calculates FIT for each paycheck using the employee’s Form W-4 settings and the IRS tax tables (percentage method, starting on page 56). Employees can change their W-4 choices in Gusto at any time, and Gusto will use the new selections for future paychecks.
If you have general paycheck questions that are not related to FIT, go to our article about paycheck tax calculations and questions.
These factors affect how much FIT Gusto withholds:
- Gross pay: The employee’s total earnings before deductions.
- Pre-tax benefits and deductions: Some benefits lower taxable wages.
- Bonus type: Bonuses on a bonus payroll may use a 22% supplemental rate.
- Regular payrolls tax bonus amounts as regular wages.
- W-4 choices: Marital status, extra withholding, dependents, or exempt status.
- Employees can find their W-4 in Documents and can update it at any time.
- Pay frequency: How often the employee is paid.
- Exemptions: True exemptions stop FIT withholding and should be managed carefully.
For a detailed explanation of these calculations, refer to IRS Publication 15T (starting on page 56). Gusto uses the percentage method.
You can find an example calculation in the Calculate taxes using the percentage method section below.
Gross wages are what employees earn before taxes, benefits, and other payroll deductions are withheld. Typically, higher earners pay more in FIT.
To find the gross wage amount Gusto uses to calculate FIT:
- Go to People.
- Click the employee’s name.
- Go to the Pay tab and scroll to Paystub.
- Click the paystub date.
- The gross wages are at the top of the page under Employee Gross Earnings and at the bottom of the paystub under Summary.
Some benefits reduce the wages that are taxed for FIT. Common examples include medical, dental, and vision insurance, as well as 401(k) and IRA contributions.
Formula
Gross earnings − pre-tax deductions (not subject to FIT) = wages subject to FIT
To see the deductions on a paystub:
- Go to People.
- Click the employee’s name.
- Go to the Pay tab and scroll to Paystub.
- Click the paystub date.
- Scroll to the Employee deductions section.
Form W-4 choices affect how much FIT is withheld from employee paychecks. If an employee adds extra withholding, claims multiple dependents or deductions, or marks exempt, that changes how much tax is withheld.
- Employees and admins can edit the W-4 in Gusto at any time.
- If someone marks Exempt from withholding, Gusto will not withold FIT from their paychecks but will still report wages as subject to FIT, as required by the IRS.
- For personal tax advice on what to enter on a W-4, employees should consult a certified public accountant (CPA) or licensed tax advisor.
The IRS calculates tax withholding based on how often employees are paid, such as weekly, biweekly, or monthly. Gust uses each employee’s pay schedule to estimate annual earnings and then withholds FIT from each paystub.
- Example: An employee earns $1,000 every two weeks. There are 26 biweekly paychecks in a year, which equals about $26,000 in estimated annual earnings. This estimate helps Gusto calculate how much tax to withhold each paycheck.
Gusto already knows how often an employee is paid based on their assigned pay schedule.
For off-cycle payrolls, you can:
- Tell Gusto which pay schedule to use for withholding, such as treating a one-time bonus as annual to avoid higher withholding.
- Choose whether to apply the supplemental tax rate of 22% or the regular tax rate for bonuses.
True tax exemptions are rare. If you set an exemption for an employee in Gusto, we will not withhold FIT or mark wages as subject to FIT on the W-2.
Confirm exemption status with the employee before adding an exemption in Gusto.
To add an exemption:
- Go to People.
- Click the employee’s name.
- Go to Taxes.
- Scroll to find the Add Special Tax Exemption link. If you've already added one, it will appear under Tax Exemptions.
Exempt from withholding
It's common for an employee to say they are exempt from withholding. This can mean one of two things:
- The employee marked Exempt from withholding on their W-4. In this case, wages are still reported as subject to FIT on the W-2.
- The employee is truly exempt. No FIT withheld, and wages are not reported as subject to FIT on the W-2. If this applies, add an exemption in Gusto.
To use the percentage method that Gusto uses to calculate tax, you’ll need:
- The gross wages subject to FIT from the relevant paystub
- The pay schedule (how often the employee is paid)
- The employee's current W-4 selections
Perform these calculations using the “Percentage method” information starting on page 56 of IRS Publication 15-T.
Percentage method calculation example
In this example, the employee is:
- Single, based on their filing status on their W-4
- Working one job, also found on their W-4
- Paid weekly
- Earning roughly $900 per week
To calculate FIT withheld using these details:
- Scroll to the weekly tax tables on page 57 of IRS publication 15-T.
- Look under the Single or married filed separately section. The pay of $900 falls between $478 and $1,126.
- Find the tentative amount to withhold column, which is $21.20.
- Find the plus this percentage column and apply the 12% tax rate on wages over $478.
- $900 – $478 = $422 (amount over $478)
- $422 x 0.12 = $50.64
- Add $21.20 + $50.64 to get the total FIT withholding of $71.84.
- If there’s extra FIT withholding listed on the W-4, add that amount to the total.
The IRS offers an online tax withholding estimator that helps employees estimate their yearly tax refund or the amount they may owe. To use the estimator, employees need a recent paystub and their W-4 information.
Based on the estimated refund or balance due, an employee may want to update their W-4. It’s best to speak with a CPA or licensed tax professional before changing their W-4 choices.
Q: Why was $0 withheld for FIT?
A: The IRS calculation may show that no FIT should be withheld. This can happen when gross pay is low or when an employee has large W-4 deductions. If you want FIT withheld, add an extra withholding amount on line 4(c) of the W-4.
Q: What if FIT was over- or under-withheld?
A: Employees reconcile any over- or under-withholding when they file their personal tax returns. Gusto cannot refund over-withheld federal income tax. Employees can update their W-4 choices to adjust future withholding. It’s best to speak with a CPA or licensed tax professional before changing their W-4 choices.
Q: Why does FIT differ from my previous employer?
A: Different payroll providers may use different inputs and calculation methods. Gusto uses the IRS tax tables and the employee’s settings in Gusto.
Compare inputs between providers to identify any differences. For more information, go to the FIT calculation factors section to see the math Gusto uses. Contact your previous provider for questions about their FIT calculations.
Q: Can Gusto give me tax advice or override taxes?
A: Gusto cannot give tax or legal advice. For complex cases, including business owners, shareholders, mergers, or non-profit organizations, speak with a tax or legal advisor. If you still need help with a tax override, contact Support from your Gusto account. In certain cases, accountants can request tax overrides for client accounts.
Q: Why do I owe a large federal tax amount on my return?
A: The IRS and state agencies determine how much tax you owe or get back based on yearly wage reports, such as forms W-2 and 1099. Gusto cannot adjust past over- or under-withholding. You can, however, update your W-4 in Gusto to change your future withholding.
Q: Why does adding extra withholding still not take out enough tax?
A: W-4 forms completed before 2020 usually withheld more tax than forms completed after 2020. If you switch from an older form to a newer one, even with extra withholding, your total may still be lower. Check the new Form W-4’s standard withholding first, then decide how much extra withholding to add.
Q: What if I do not agree with Gusto’s tax calculations?
A: Different methods can be used to calculate federal and state taxes. Gusto uses the IRS percentage method and the employee’s Form W-4 settings. If your results differ, you may be using a different method.
Gusto’s tax engine is powered by Symmetry, an industry-standard provider. You can test Symmetry’s calculator with your own data to compare results.