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How much should I withhold from employee paychecks?

There are several layers of withholding and each one has its own rules. Getting any of them wrong means you either owe the government back taxes and penalties, or your employees get hit with a surprise bill at tax time.

Federal income tax withholding is based on each employee’s W-4 form. The amount varies by their filing status, number of dependents, and any additional withholding they request. There’s no single percentage that applies to everyone. The IRS publishes withholding tables that tell you the exact amount based on wages and pay frequency. This is one area where payroll software pays for itself because the calculations change with tax law updates.

Social Security tax is 6.2% of gross wages, and you match that with another 6.2% from the employer side. Medicare is 1.45% from the employee and 1.45% from you. Together that’s 7.65% withheld from the employee’s check and 7.65% you pay on top of their wages. For employees earning over $200,000 in a calendar year, there’s an additional 0.9% Medicare withholding that comes out of their pay only.

California adds its own requirements. State income tax withholding works similarly to federal, based on the employee’s DE-4 form or their federal W-4. California also requires State Disability Insurance withholding from employees at a rate the state sets each year. You don’t match SDI, but you are responsible for withholding and remitting it. On your side as the employer, you also pay into California’s unemployment insurance fund, which doesn’t come out of the employee’s check but still factors into your total payroll cost.

For trades and construction businesses running crews, payroll withholding mistakes tend to snowball fast. You might have workers at different pay rates, overtime kicking in regularly, and occasional bonuses or per diem. Each situation affects withholding differently. Overtime wages get withheld at the same tax rates but the higher gross pay can push into a different bracket for that pay period.

The practical answer is to use payroll software or a payroll service rather than trying to calculate all of this by hand. Between federal tables, California state rates, SDI, and local requirements, manual calculations are a recipe for errors. Good payroll system setup means the software handles the math correctly from day one.

One thing many business owners overlook is that withholding is only half the equation. You also need to deposit those withheld taxes on schedule and file quarterly returns. Federal deposit schedules depend on your total tax liability, and California has its own filing deadlines. Late deposits trigger penalties that add up quickly.

If you’re running bookkeeping for a trades business and handling payroll, make sure your books reflect both the employee withholdings and your employer tax obligations accurately. The payroll liabilities sitting in your account aren’t your money. They belong to the IRS and the state, and treating them like cash flow is one of the fastest ways to end up in serious tax trouble.

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Long Beach CPA firm specializing in contractors, trades, and service businesses. Bookkeeping, tax preparation, IRS representation, and advisory services for businesses across the South Bay and Greater LA. Owned and operated by a CPA with over a decade of hands-on experience.

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