Whether you pay or get paid, you should know how federal income tax (FIT) works.
If you’re an employee, you want to understand how your employer calculates your final earnings. And if you’re an employer, you may get hit with questions about payroll deductions, especially about those hard-to-decipher abbreviations for different types of taxes.
In this practical guide, learn the FIT tax meaning and how this concept, also known as FIT taxable wages, affects a paycheck’s bottom line.
What is FIT on my paycheck?
FIT wages are the part of an employee’s earnings that are subject to federal taxation. Employers must withhold the correct corresponding percentage of federal taxes from paychecks based on the FIT taxable wage amount.
FIT taxable wages include standard compensation (a person’s salary or hourly wages), bonuses, commissions, and certain retirement contributions. The IRS can also tax some fringe benefits like vacations or club memberships, treating the fair market value of the perk as income.
The IRS has guidelines for determining how much tax each employee should pay based on their income bracket—a designation that also corresponds to taxable wages only. Other types of earnings, like healthcare or welfare benefits, aren’t considered federal tax income and therefore aren’t subject to withholding.
Who pays FIT?
While most employees (and self-employed individuals) pay FIT, not everyone does. People with incomes under a certain threshold have no federal tax liability. Others may find they owe net-zero taxes due a combination of low income and tax credits that nullify any amounts they would have paid.
Where do FIT deductions go?
Employers withhold federal income tax from employees’ paychecks and send it to the IRS to be used toward federal expenses. Federal taxes feed into governmental initiatives, including:
- Energy
- Education
- Federal debt interest
- Federal retirees' and veterans’ benefits
- Scientific research
- Law enforcement
- National defense
- Transportation
Anyone curious to know exactly how these tax dollars are spent can review the U.S. Office of Management and Budget’s most recent percentage breakdown of funds distributions.
How much is federal income tax?
FIT rates differ from employee to employee. It’s the employer’s responsibility to correctly determine the rate using the information each person provides in their W-4. Here are a few key considerations that help employers define employees’ withholding percentage:
IRS tax bracketing
The IRS establishes progressive tax brackets where higher earnings mean higher tax withholding percentages. For example, a person who earns $40,000 per year might pay 12%, while an employee with an income of $110,000 pays 24%. The IRS provides tables with this information.
Filing status
Employees can choose one of five filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse. The categories affect withholding amounts, but the calculations for each case look a bit different. For example, some married people save on taxes because they gain access to perks (like child credits), while other couples pay more because their combined income puts them in a higher tax bracket.
Withholding allowances
Employees can claim withholding allowances on their Form W-4 that reduce the amount of taxes they pay.
For example, having children dependents is a withholding allowance, and parents pay less in taxes out of each check than non-parents. However, withholding allowance rules have been changing with new legislation. Stay up on the latest modifications to federal law and only use the most recent IRS-provided calculators to estimate withholding allowances.
How to calculate FIT taxable wages
To calculate FIT taxable wages for each of your employees, you’ll need to have their earnings records and Form W-4 handy. Then, follow these steps:
- Determine the total taxable wages: Calculate the employee’s total FIT wages by adding up compensation for work performed, bonuses, fringe benefits, commissions, and any other eligible earned income and subtracting deductions from this gross pay amount. Don’t include non-taxable amounts like healthcare benefits
- Apply FIT withholding: Determine the employee’s tax bracket using the most recent tables from the IRS. Apply this withholding amount to the taxable income.
- Adjust for employee allowances or additional withholdings: With the introduction of the One, Big, Beautiful Bill Act (OBBBA) into U.S. legislation, previous methods of calculating exact withholdings have changed. Work with your organization’s accountant or a payroll expert, like Oyster, to make sure all calculations are correct and align with new laws.
- Complete payroll: Employees also often have other types of taxes withheld from their paychecks in addition to federal ones. Account for state tax withholding based on the laws in your geographical area and payroll taxes. Payroll taxes include Federal Insurance Contributions Act or FICA taxes, which cover employees’ payments into Medicare, Social Security, and Federal Unemployment Tax Act (FUTA).
Common mistakes with FIT taxable wage calculations
Prevent confusion by avoiding the following common errors in calculating FIT taxable wages.
Misclassifying taxable wages
Not all forms of income are taxable, but most are. It’s important to comprehensively document and sum up all earnings—including payments like fringe benefits that are less cut-and-dry.
Incorrect W-4 allowances
Employees may need guidance filling out Form W-4s to correctly account for withholding allowances. HR or accounting professionals on your team can swoop into help. Gathering correct information from W-4s prevents future withholding errors.
Relying on old information
Keep up with legislation changes affecting the W-4 form and deductions. These laws are in flux, and even your existing employees may need to submit new W-4s to claim the latest deductions. Employers also can’t reliably calculate deductions and withholding as they once had and should learn the new standards.
Simplify payroll and compliance Oyster
Correctly calculating FIT taxable wages is just one of the key compliance challenges all HR teams should know about. And if your organization works globally, staying compliant for different geographical areas can be even more of a headache.
Simplify the work with Oyster’s employer of record (EOR) services and keep your team on the right track, no matter where they work. Streamline payroll compliance across borders and make correct, timely payments to every member of your dispersed team.
FAQ
Taxation is a tricky subject—one that no employer (or employee) wants to get wrong in the eyes of the IRS. Here are a few commonly asked questions.
What is the minimum federal tax withholding?
Technically, minimum federal tax withholding can be zero percent if the individual in question has a very low income. As of 2025, taxation starts on around $11,000 in annual income with a rate of 10%. On the other side of the scale (high earners), the rates have historically been in the 37% range. Be sure to check the IRS’s most recent tax bracket table for up-to-date information.
Is the taxable wage base for FIT the same for state and local taxes?
No. Federal tax is calculated in the same way across the nation, but states have different laws on what parts of a person's income are subject to tax. For example, New Hampshire only taxes interest and dividends and at a flat rate. And other jurisdictions, like Alaska, Nevada, Texas, and Wyoming, have no state income tax.
How do self-employed individuals pay FIT?
Contractors and freelancers (1099 workers) pay FIT, even though no employer withholds taxes from these individual’s wages. Non-employees are responsible for calculating and depositing their quarterly estimated tax amounts to the IRS, which include a mix of income tax and self-employment tax amounts.
What’s the difference between payroll taxes and FIT?
Payroll taxes are contributions to Social Security, Medicare, and Federal Unemployment Tax Act (FUTA). Employers and employees split paying payroll tax. FIT is a separate concept, representing the taxes that funnel into federal initiatives, like education and defense.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
