How is federal tax withholding calculated per paycheck?

Question

I just started at a new company and received my first paycheck. It included a signing bonus, which of course made the paycheck much higher than a normal one will be. The fed withholding amount on the paycheck was much higher than I thought it would be, by a few percentage points.

How does payroll normally calculate the withholding amount? Obviously, the amount for the whole year can't be calculated, so it has to be predicted in a sense. But does payroll use the amount that they know is my annual salary, or do they do some sort math to simulate the gross pay on each paycheck being the same for the rest of the paychecks in a year?

Answer 1

The IRS publishes an exhaustive set of explicit lookup tables in Publication 15

1. Determine the payroll period-weekly, biweekly, monthly, etc. For bonuses and exceptional payments there several options available.

2. Determine your exemption, a function of the allowances you reported on W-4 and payroll period (and technically, citizenship status).

3. Take the gross amount in the check. Subtract the exemption. Cross reference the net amount in the lookup table for the payroll period. That's the amount withheld.

Answer 2

The short answer is "it depends."

Generally, your employer (or more accurately your employer's payroll vendor) will use the gross amount of your payment, times the number of pay-periods to derive an annual number for purposes of withholding. Obviously this adversely impacts less frequently received bonuses.

I had an employer allow me to advise the payroll vendor to use a quarterly frequency on my bonus checks, which helped. I was also able to specifically address 401K contributions from my bonuses. My current employer doesn't allow ad-hoc changes like that; which is understandable.

Either way, this will all shake out when you file your taxes at the end of the year. Make sure you have an up to date W-9 on file with your employer so you're at least claiming your proper exemptions, etc.