This article is for admins and employees who want to understand federal income tax (FIT) withholding: how Gusto calculates it, how to check the math, and what to do when it looks too high, too low or $0.
Gusto calculates FIT for each paycheck with the IRS percentage method for automated payroll systems (IRS Publication 15-T, starting on page 10). The amount depends on the employee's pay, pre-tax deductions, pay schedule and Form W-4 choices. Employees can change their W-4 in Gusto at any time, and the new choices apply to future paychecks.
For other paycheck taxes, like Social Security, Medicare and state income tax, go to Paycheck calculations and taxes.
Gusto follows the same steps for every paycheck. They come from Worksheet 1A in IRS Publication 15-T (page 10).
Start with gross pay for the pay period. This is everything the employee earned before taxes and deductions. Higher gross pay usually means more FIT.
Subtract pre-tax deductions, like health insurance premiums and traditional 401(k) contributions. What is left is the wages subject to FIT.
Estimate yearly wages. Multiply by the number of paychecks in a year, based on the employee's pay schedule (for example, 52 for weekly or 26 for biweekly).
Apply the employee's W-4. Add other income from Step 4(a) and subtract deductions from Step 4(b). If the Step 2 box is not checked, the IRS worksheet also subtracts a set amount.
Find the yearly tax in the IRS table for the employee's filing status, then divide it by the number of paychecks in a year.
Subtract the Step 3 credits for one paycheck (the yearly amount divided the same way), then add any extra withholding from Step 4(c).
No FIT is withheld if the employee chose Exempt from withholding on their W-4 or has a federal income tax exemption in Gusto.
Bonuses can follow different rules. On a separate extra pay payroll, Gusto uses the 22% federal supplemental rate by default. A bonus added to a regular payroll is added to the employee's regular wages, and Gusto withholds on the total at the regular rate.
Expand the sections below for details on each step and a worked example.
Gross wages are what an employee earns before taxes, benefits and other deductions. They are the starting point for FIT, and higher earners usually have more FIT withheld.
To find the gross wages Gusto used for a paycheck:
Go to People.
Click the employee's name.
Go to the Payment tab and find the Recent paystubs card.
Click the paystub date.
Find the gross wages at the top of the paystub under Employee Gross Earnings and at the bottom under Summary.
Employees can view their own paystubs in Gusto.
Pre-tax benefits and deductions lower the wages subject to FIT, so less FIT is withheld. Common examples are medical, dental and vision insurance premiums, and traditional (not Roth) 401(k) and IRA contributions.
Formula: Gross earnings − pre-tax deductions = wages subject to FIT
To see the deductions on a paystub:
Go to People.
Click the employee's name.
Go to the Payment tab and find the Recent paystubs card.
Click the paystub date.
Scroll to the Employee deductions section.
The IRS tables use yearly amounts. So Gusto uses each employee's pay schedule to turn the pay for one paycheck into an estimated yearly amount. Then it divides the yearly tax back into paychecks.
Example: An employee earns $1,000 every two weeks. There are 26 biweekly paychecks in a year, so their estimated yearly earnings are about $26,000.
Regular payrolls: Gusto uses the employee's assigned pay schedule.
Off-cycle payrolls: you can choose:
Which pay schedule to use for withholding. For example, treating a one-time bonus as annual can lower the withholding on it.
Whether to use the 22% federal supplemental rate or regular tax rates for a bonus. On a separate extra pay payroll, Gusto uses 22% by default.
A bonus added to a regular payroll is added to the employee's regular wages, and Gusto withholds on the total at the regular rate.
An employee's Form W-4 tells Gusto how much FIT to withhold. Each part of the form changes the amount:
Filing status (Step 1(c)): Each filing status has its own IRS table.
Multiple jobs (Step 2): Checking the box uses IRS tables with narrower brackets, so more FIT is withheld.
Dependents and other credits (Step 3): Credits lower FIT.
Other income (Step 4(a)): Adds to yearly wages, so more FIT is withheld.
Deductions (Step 4(b)): Lower yearly wages, so less FIT is withheld.
Extra withholding (Step 4(c)): Adds the same amount to every paycheck.
Exempt from withholding: Gusto does not withhold FIT, but still reports the wages as subject to FIT, as the IRS requires. Employees who claim exempt need to renew it by February 15 each year (IRS Publication 15).
Employees still on a 2019 or earlier W-4 have their withholding figured from allowances instead of Steps 2 through 4.
Employees and admins can view and update the W-4 in Gusto at any time, and employees can find their signed W-4 in Documents. Changes apply the next time payroll runs. For advice on what to enter, employees should talk with a CPA or other tax professional.
When an employee says they are exempt from FIT, it can mean one of two things:
They chose Exempt from withholding on their W-4. Gusto does not withhold FIT, but still reports their wages as subject to FIT on the W-2.
They have a true tax exemption. These are rare. Gusto does not withhold FIT and does not report the wages as subject to FIT on the W-2.
Confirm which one applies with the employee before you change anything in Gusto.
To set up a true exemption, follow Add a tax exemption for your company or an employee. Some income tax exemptions need help from our team to set up.
To check FIT by hand, 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
This example uses the percentage method tables for manual payroll systems, starting on page 57 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 58 of IRS Publication 15-T.
Look under the Single or Married Filing Separately section. The pay of $900 falls between $548 and $1,279.
Find the tentative amount to withhold column, which is $23.80.
Find the plus this percentage column and apply the 12% tax rate on wages over $548.
$900 – $548 = $352 (amount over $548)
$352 x 0.12 = $42.24
Add $23.80 + $42.24 to get the total FIT withholding of $66.04.
If there’s extra FIT withholding listed on the W-4, add that amount to the total.
Gusto’s own calculation uses Worksheet 1A (page 10) and the yearly tables for automated payroll systems (page 12) of IRS Publication 15-T, so a paystub can differ from this example by a few cents.
FIT can be $0 when the employee's pay and W-4 choices bring the tax to zero. Check these causes, starting with the most common:
The employee is exempt. They chose Exempt from withholding on their W-4, or they have a federal income tax exemption in Gusto. For the difference, open Exempt from withholding vs. a tax exemption in How Gusto calculates FIT, step by step.
Pay for the period is low. If the Step 2 box is not checked, the IRS method leaves the first part of yearly wages untaxed. Low pay can fall under that amount.
Large credits in Step 3. If the credits are more than the tax figured for the paycheck, FIT is $0.
Large deductions in Step 4(b). Deductions lower the wages the tax is figured on. Starting in 2026, they can include the new deductions for qualified tips and overtime.
A 2019 or earlier W-4 with many allowances. Each allowance lowers the wages the tax is figured on.
Do not withhold is an option on some state forms only. The federal option is Exempt from withholding.
To have FIT withheld, the employee can update their W-4 in Gusto, for example by adding extra withholding in Step 4(c). Changes apply to future paychecks. Gusto cannot withhold FIT on paychecks that were already paid. If FIT was $0 on an older paycheck but not now, the employee's W-4 may have been different when that payroll ran.
FIT changes when anything in the calculation changes. Start with what changed since the last paycheck:
Pay: More hours, overtime, a raise or a bonus added to a regular payroll raises gross pay, and FIT rises with it.
Pre-tax deductions: A benefit that ended or a lower 401(k) contribution leaves more wages subject to FIT.
W-4: Any change to the W-4 changes FIT. Checking the Step 2 box, lowering Step 3 credits or adding extra withholding raises it.
A new year: The IRS updates its withholding tables every year, so FIT can change on the first paycheck in January even when nothing else did.
An off-cycle payroll: The pay schedule or tax rate chosen for that payroll changes the result.
If FIT is higher than with a previous provider or a paycheck calculator
Different results usually come from different inputs. Compare these settings in both places, starting with the Step 2 box, which makes the biggest difference:
Step 2 box (checked or not)
Filing status
Step 3 credits
Step 4(a) other income
Step 4(b) deductions
Step 4(c) extra withholding
Pay frequency
W-4 version (2019 or earlier, or 2020 or later)
Gusto's tax engine is powered by Symmetry, an industry-standard provider. You can test Symmetry's calculator with the same inputs to compare. For questions about how a previous provider calculated FIT, contact that provider.
The IRS Tax Withholding Estimator helps employees see whether their withholding is on track for the year, and whether they may get a refund or owe tax. They need a recent paystub and their W-4 information to use it.
Based on the results, an employee may want to update their W-4 in Gusto. It's best to talk with a CPA or other tax professional first.
Over- or under-withholding is settled when employees file their tax return
The IRS and state agencies figure what an employee owes or gets back from yearly wage reports, like Forms W-2 and 1099. Gusto cannot refund over-withheld FIT or change withholding on past paychecks. To change future withholding, employees can update their W-4 in Gusto. It's best to talk with a CPA or other tax professional first.
Extra withholding after switching from a 2019 or earlier W-4
The current W-4 uses filing status, Step 2, credits and deductions instead of allowances, so switching forms can change withholding a lot, even with extra withholding added. Check the withholding on the new form first, then decide how much extra to add in Step 4(c).
Tax advice and FIT overrides
Gusto calculates FIT with the IRS percentage method and the employee's W-4. We cannot give tax or legal advice. For complex cases, like business owners, shareholders, mergers or nonprofit organizations, talk with a tax or legal advisor. If you still need help with a tax override, contact us from your Gusto account. In some cases, accountants can override income tax withholding for client accounts.