Federal income tax (FIT) is withheld from employee earnings each payroll. Gusto calculates employees' federal income tax using the tax withholding information entered in Gusto (Form W-4) and the current IRS tax tables (starting on page 56)—W-4 elections can be changed at any time in Gusto.
Use the dropdowns below to learn more, or use CMD + F (or CTRL + F) to search for keywords throughout the article.
FIT calculations are impacted by all the below—learn more about each in the dropdowns that follow.
For an in-depth description of the tax calculations, check out IRS Publication 15T (page 56 to start)—Gusto uses the “percentage method”. Find an example calculation in the Calculate taxes using the percentage method dropdown below.
Gross wages are what employees earn before taxes, benefits, and other payroll deductions are withheld from their wages. Typically, higher earners will pay more in FIT.
Admins can follow the steps below to find the gross wages on employee paystubs:
Once you’ve found the gross earnings, you can use that number to help calculate FIT.
When finding the total taxable wages for FIT, in addition to finding the gross earnings, you must also account for pre-tax benefits and deductions. Some pre-tax benefits are not subject to FIT, and therefore change the wage amount that’s subject to be taxed for FIT.
Common pre-tax benefits that are not subject to FIT (some, not all):
In summary
Gross earnings – Pre-tax benefit deductions (not subject to FIT) = Total wages subject to FIT
Admins can follow the steps below to find the deductions on employee paystubs:
Common pre-tax benefits that are not subject to FIT (some, not all):
Learn how to view or update W-4 elections in Gusto (for employers and employees). Factors that might impact the FIT withheld include:
An employee's pay frequency (or pay schedule) plays an important part in determining the tax bracket they fall into and, in turn, how much FIT they should have withheld based on their overall anticipated earnings.
While FIT is calculated on a per-paystub basis, the IRS still factors in how frequently an employee is expected to receive that amount in wages.
On regular payrolls, Gusto already knows the frequency that an employee will be paid based on the pay schedule they’re assigned to.
For off-cycle payrolls, customers can choose to edit withholding rates by letting us know:
If the company or an employee has a true exemption for FIT set up in Gusto, we won’t withhold any FIT from paystubs, and will not report the wages as being subject to FIT on the W-2.
View or add an employee exemption in Gusto:
To use the percentage method (like Gusto does) for calculating tax, you’ll need to know:
Perform calculations using “Percentage method” information starting on page 56 of IRS publication 15-T.
Percentage method calculation example
For this example, the employee is:
How to calculate FIT withheld using the above details:
Q: Why was there $0 in federal income tax withheld on a paycheck?
A: Sometimes the IRS calculates that $0 in taxes need to be withheld from a paycheck—this most often happens when someone isn’t earning enough in gross wages for taxes to be withheld.
It can also happen if someone has several deductions listed on line 4(b) of their W-4. Reducing this number can increase FIT withheld.
If no FIT is being withheld based on standard calculations, but withholding is desired, enter “Extra Withholdings” on line 4(c) of the W-4.
Q: An employee's federal income taxes were over or under withheld on a paycheck—what do they need to do?
A: State and federal tax withholding amounts get reconciled through personal tax returns at the end of the year. Gusto cannot refund overpaid income tax. This means if taxes were over-withheld, employees may see larger tax refunds on their person returns. Alternatively, if taxes were under-withheld, they may owe more at the end of the year.
Employees can always update their W-4 elections in Gusto to try to modify the amount(s) being withheld per paycheck—check with a CPA or accounting professional for explicit advice about what selections to make.
Q: Why do I owe a big federal tax amount on my personal tax return?
A: The federal and state government determine what taxes are owed (or owed back) based on an individual’s unique wage reports for the year (W-2s, 1099-Bs, etc). All amounts owed (or due back) must be reconciled outside of Gusto, as we cannot fix over or under withheld FIT retroactively.
Employees can, however, update their FIT withholdings going forward as needed.
Q: Why are the FIT amounts different from a previous company or payroll provider?
A: We can only let you know how Gusto calculates FIT, and use the current employee-settings that are listed in Gusto. Use the FIT calculation factors information above to see the math we use, and reach out to previous providers if you have questions about their FIT calculations.
Q: How come adding “Extra Withholding” still doesn’t withhold enough FIT?
A: This is a tricky one—W-4s filled out by employees prior to 2020 generally have higher withholding amounts than W-4s that were filled out after that year. Today, if an employee updates a W-4 that was originally filled out before 2020 (in this case, to add extra withholding), they’re forced to use the new W-4, which typically has lower withholding amounts in comparison.
Essentially, if you go from the old W-4, to the new W-4, and add “extra withholding”, it still may not be enough. Employees should check out the standard withholdings using the new W-4, and then decide how much extra withholding is needed from there.
Q: What if I don't agree with Gusto's tax calculations?
A: If you arrive at, or were expecting a different calculation than Gusto's income tax withholding amount(s), it could be because you're using a different method for the calculation—there are multiple options and ways to calculate federal (and state) taxes. There's an example Gusto-calculation using the IRS tax tables and “percentage method” in the FIT calculation factors dropdown above in this article.
Our tax calculators are powered by the industry-approved Symmetry tax engine. You can test out Symmetry's calculations here—be sure to include all relevant information.
Q: Can Gusto provide customized tax advice for my unique circumstances (e.g., owners, shareholders, mergers/acquisition, non-profit or other special status)?
A: Unfortunately, no. Gusto cannot provide tax or legal advice, and you should always consult a tax or legal advisor that knows your situation. If you're learning on your own, we recommend reaching out to the IRS or state agencies directly to explain your situation, and get the latest requirements directly from the source(s).
Q: Can I override Gusto's taxes?
A: We'll work with you on a case by case basis to figure out your options. If you've consulted a tax professional and believe an override is necessary, contact us from the Help or Priority support section of your account.