Withholding taxes are amounts taken from each paycheck to cover federal, state, and local tax obligations, plus Social Security and Medicare. They depend on the employee’s tax setup, pre-tax deductions, and whether pay is regular or supplemental.
This article explains the major components of withholding and how they work.
What taxes are typically withheld
Federal income tax (FIT) on regular or supplemental wages.
Social Security and Medicare (FICA).
In 2025, Social Security is 6.2% (employee) up to a $176,100 wage base; Medicare is 1.45% with no wage cap, plus 0.9% Additional Medicare on earnings over $200,000.
State income tax, where applicable — 41 states have their own income tax rules.
Local income tax, required in certain jurisdictions across 15 states.
Federal income tax (FIT)
FIT considers pay frequency, the employee’s Form W-4, pre-tax deductions, and whether pay is regular or supplemental. For supplemental pay, the IRS allows two flat-rate options:
22% flat rate (for year-to-date supplemental wages up to $1M)
37% flat rate (mandatory once supplemental wages exceed $1M)
Social Security and Medicare (FICA)
FICA is withheld on most wage types. For 2025:
Social Security: 6.2% up to $176,100 in wages ($10,933.20 maximum tax per employee)
Medicare: 1.45% with no cap
Additional Medicare: 0.9% applies to wages above $200,000 (employee only)
Constructive receipt and timing
Wages are taxable when the employee has unrestricted access to the funds. For example, a paycheck dated December 30, 2025 but delivered on January 4, 2026 is taxable in 2026.
Tips
Employers must withhold taxes on reported tips of $20 or more in a month. FICA applies to tips in addition to regular wages.
Starting in tax year 2025 (returns filed in 2026), employees and self-employed persons in qualifying tipped occupations can take a federal income tax deduction for qualified tip income (i.e. tips that are voluntary, reported, and received in occupations that customarily receive tips).
The deduction is capped at $25,000 of tip income per individual (for those who qualify) for each year 2025 through 2028.
State income tax (SIT)
Employers must withhold state taxes if they have nexus in the state. Nexus can be created by:
Physical offices or facilities
Remote employees
Service or sales activity in the state
Multi-state employees may be subject to reciprocity agreements, resident vs. nonresident rules, and dual reporting.
Local income taxes (LIT)
Some states require local income tax withholding based on where the employee works, lives, or both. As of 2025, 15 states have local taxing jurisdictions.
Supplemental pay (bonuses, commissions, severance)
Employers can calculate FIT on bonuses and similar pay by:
Aggregate method (combine with regular wages)
Flat-rate method (22% or 37% depending on the YTD total)
Example: A $500 bonus at the flat 22% rate = $110 FIT withheld.
Insufficient wages to cover all taxes
When wages are too low to cover all required taxes, withholding follows a defined order. Any uncollected Social Security or Medicare is reported on Form W-2 (Box 12 Codes A/B).
Need help?
If you have questions or need assistance, please contact Salaris Payroll Support. We’re here to help.