Next in line of priority for deductions is Federal tax.
The first step is ascertaining the filing status and withholding status of the individual from the W-4 form. The W-4 form is filed by the employee to indicate tax filing status and exceptions. The withholding status declaration on the W-4 form is for claiming allowances, and directs the employer to withhold tax based on exemptions claimed. If the individual does not submitted the W-4 form to the employer, default value is “single" filing status and zero withholding allowances.
The IRS Publication 15 (Circular E), revised annually is the employer guide payroll deductions. This guide specifies the amounts of withholding allowances and tax rates. The 2011 allowance for one withholding allowance is $3700 annually. Employees may claim fewer withholding allowances than entitled, to offset tax on other income not subject to withholding.
The next step after determining withholding allowances is calculating taxable income and making appropriate deductions. Taxable income is gross pay less 401(k), less the sum of withholding allowances. The IRS prescribes a minimum amount as deemed taxable income for tipped employees.
Federal income tax depends on the filing status, and the tax deduction is a percentage of the taxable income. Publication 15 of IRS offers a table that shows the percentage to deduct for each income level and category.
The employer needs to send a W-2 form that details the federal income tax deductions made, to both the employee and the IRS at the end of the year
At present, 41 states levy state income tax. The figure varies from state to state, and the relevant state instructions are obtainable from the each state's Department of Revenue. Many states also levy state disability or unemployment insurance tax.
Besides the federal and state tax, many cities and counties charge local taxes.
One important point of note is that severance pay processed through payroll may also attract taxes.