How Federal Income Tax Withholding Works

Your employer does not guess. There is an exact procedure in IRS Publication 15-T that turns your W-4 into a number, and once you have seen it the whole system stops being mysterious — including why overtime seems over-taxed and why two-job households end up owing.

Tax year 2026 · Updated 2026-08-29 · Guide

Step 1 — annualize the pay period

Take your taxable wages for this pay period and multiply by the number of periods in the year. A $3,000 bi-weekly check becomes $78,000.

This single step explains most of what people find strange about withholding. A pay period that is unusually large — because of overtime, a bonus, or a commission — is treated as though every period would look like that, so it is withheld at the rate for a much higher salary. The excess comes back when you file. Nothing is taxed at a penalty rate.

Step 2 — apply the W-4 adjustments

Add Step 4(a) other income. Subtract Step 4(b) deductions. Then subtract a fixed offset — $12,900 if you are married filing jointly and did not check the Step 2 box, $8,600 otherwise, and $0 if you did check it.

That offset is half the puzzle of how the standard deduction is applied. The other half is built into the tables, which start with a 0% band. For a single filer in 2026: $8,600 offset plus a $7,500 zero band equals $16,100 — exactly the standard deduction. For joint filers, $12,900 plus $19,300 equals $32,200. The arithmetic is deliberate and it reconciles precisely.

Step 3 — look it up in the schedule

There are two sets of annual schedules. The Standard set applies when the Step 2 box is unchecked. The Step 2 Checkbox set applies when it is checked, and it uses half-width brackets with no offset — which approximates a household with two similar incomes.

The 2026 Standard schedules begin as follows.

Compute the tax on the adjusted annual wage using that schedule, then divide by the number of pay periods.

Step 4 — subtract credits and add extra

Take the Step 3 dependent credit total — $2,200 per qualifying child under 17 and $500 per other dependent for 2026 — divide it by your pay periods, and subtract it. The result is floored at zero: credits can reduce withholding to nothing but never below.

Finally, add any Step 4(c) extra withholding. It is added after the floor, so it always increases withholding dollar for dollar.

A worked example

Single filer, $78,000 salary, paid bi-weekly, no dependents, Step 2 box unchecked, no Step 4 entries.

• Annualized wages: $3,000 × 26 = $78,000
• Less the $8,600 offset: adjusted annual wage $69,400
• From the Standard single schedule: $1,240 on the band to $19,900, then 12% of ($57,900 − $19,900) = $4,560, then 22% of ($69,400 − $57,900) = $2,530
• Annual tax: $8,330. Divided by 26 periods: $320.38 per paycheck

The calculator above produces the same figure. Change the Step 2 checkbox and watch it jump — that is the two-job schedule at work.

Other methods your employer may use

The percentage method described here is the one used by automated payroll systems and the one this site implements. Publication 15-T also contains wage bracket tables for manual payrolls, which round to bands and produce slightly different figures — a legitimate reason for a few dollars of difference between your stub and any calculator.

Supplemental wages such as bonuses have their own optional flat rate of 22%, and pension payments use Form W-4P with its own tables.

Frequently asked questions

Related