How to Calculate the F.I.T Tax
All individuals and companies who do business in the U.S. are subject to certain taxes. As a business owner, you are responsible for withholding the federal income tax from your employees' earnings. This is known as the FIT tax and it applies to all wages, bonuses, cash gifts from employers and other forms of compensation.
Whether you have a small business or an established company, it's important to know the amount of FIT withheld so you can comply with the law. The IRS has set up seven marginal tax brackets based on the information employees provide on Form W-4 before receiving their first paycheck.
When people are self-employed, work for a company or run their own business, they receive compensation for the services they provide. Those who are employed receive their earnings as net income, which represents the gross income or total income minus Social Security tax, federal income tax and other deductions.
The government collects these taxes and uses them to fund projects, build or maintain infrastructure, pay benefits and more. All earnings are subject to state and federal withholding. Federal taxes are consistent everywhere throughout the U.S. while state taxes vary among states.
If you're a business owner, you must withhold the federal income tax from your employees' salaries, bonuses and other earnings. The FIT tax also applies to gambling winnings, commissions and vacation pay. Each year, the IRS updates the marginal tax brackets so that employers can estimate how much they need to withhold from workers' wages.
Federal taxes are based on a progressive tax system and vary among employees. When you hire someone, your new employee is required to fill out Form W-4 so you can determine the total amount of FIT withheld. This form includes three types of information based on which the federal income tax is calculated.
For example, employees who are married will pay a higher tax than those who are single. Additionally, the more withholding allowances an employee claims, the less tax he or she will pay. Another factor that influences how much he will pay in tax is the amount earned. As an employee's salary increases, so does his federal income tax rate.
After you receive Form W-4 from your employee, you can use the wage bracket method to calculate his or her federal income tax. This year, for instance, a single individual who makes $20,000 per year is subject to the 12 percent tax bracket. However, this doesn't mean 12 percent on everything earned. The employee in question will pay only 10 percent on the first $9,525 and 12 percent of the rest.
There are several ways to determine federal withholding. In addition to the wage bracket method, you may use the online tax calculator on the IRS website. Simply enter the information your employees have provided on Form W-4. With this method, it takes just a few minutes to calculate their FIT tax.
If you have an accountant, he or she will be responsible for calculating state and federal income taxes. Just make sure you provide your employees' information. In case a mistake occurs on the FIT payroll, you can fill out Form 941-X to make any adjustments that may be necessary.