What Is Federal Withholding?

• Federal withholding is the amount withheld from each paycheck. This is done to ensure that the taxpayer will have the approximate amount he owes in taxes already paid before the end of the year. It is calculated using the federal withholding tax tables found in the Internal Revenue Service's publication Circular E. The taxpayer's annual wages are calculated based on salary or hourly pay. The total owed for taxes for that income level is then divided up into each payroll period, and this amount is removed from earnings and paid to the IRS.
  
  

What Is FICA?

• The Federal Insurance Contributions Act (FICA) was passed in 1935 to set aside funds out of a taxpayer's earnings for contributions to the Social Security program. The total FICA tax is a 6.2 percent contribution for Social Security and a 1.45 percent contribution for Medicare. The employer must match these percentages. The total amount contributed is thus 15.3 percent.
  
  

Adjusting Federal Withholding Amounts

• One factor that determines the amount of federal withholding is the number of exemptions claimed by the employee on IRS Form W-4. Since the amount of federal withholding is based on the approximate amount of taxes that will be owed at the end of the year, adding exemptions will reduce the amount being withheld because the exemptions will reduce taxable income. A Form W-4 may be filed at any time during the year and can be altered throughout the year to add or remove exemptions.
  
  

Adjusting FICA Amounts

• One of the key differences between FICA and federal withholding is that the latter may be adjusted with a change in exemptions, while FICA percentages are fixed and cannot be adjusted. Some jobs, however, can adjust the wages on which FICA is payable. For example, those working in the ministry may have part of their wages designated as a housing or car allowance, thereby exempting that amount from total wages taxable and reducing the amount of Social Security and Medicare taxes withheld. In the corporate world, this is done by making a portion of salaries payable in stock options, which has the same effect and reduces the FICA taxes withheld.
  
  

Where Do These Payments Go?

• Amounts withheld in federal withholding go toward paying taxes owed at the end of the year by the taxpayer. The funds are held by the IRS until the tax return is filed and either more taxes are paid or a refund is issued. Amounts withheld for FICA go into the Social Security and Medicare programs. The former provides retirement income, benefits for family survivors when a taxpayer dies and benefits for the disabled who cannot work. Medicare goes toward retired taxpayers' medical expenses.