Glossary
Payroll

Federal Withholding

By: Alec Hollingsworth
Updated:  
June 16, 2025

DEFINITION:

Federal withholding is the portion of employee wages withheld by employers to prepay federal income taxes to the IRS.
Federal withholding is the process by which employers deduct a portion of an employee’s wages to remit directly to the Internal Revenue Service (IRS) as a prepayment of the employee’s federal income tax liability. The amount withheld depends on the employee’s earnings, tax filing status, and information provided on their W-4 form. For nonprofits, proper federal withholding ensures compliance with IRS regulations and helps employees avoid large tax bills or penalties at year-end. These funds are sent periodically to the IRS and are reflected on employees’ annual W-2 forms, summarizing total wages and withholdings for tax reporting purposes.

Key Takeaways

  • Mandatory deduction from employee wages for federal income tax.
  • Based on employee earnings and W-4 elections.
  • Helps employees avoid large tax bills at year-end.
  • Nonprofits must comply with IRS withholding rules.

Why It Matters

Ensures tax compliance and prevents unexpected tax liabilities for employees and organizations.

Real World Example

A small nonprofit hires a new employee and collects a completed W-4 form. Each time payroll is processed, the nonprofit withholds the correct federal income tax amount based on the employee’s earnings and W-4 information. These funds are deposited with the IRS on a regular schedule. At year-end, the nonprofit issues a W-2 form showing total wages and total federal income tax withheld. By properly managing federal withholding, the nonprofit ensures both IRS compliance and that the employee is less likely to owe a large sum when filing their individual tax return.

How Aplos Helps

In Aplos, you can manage payroll transactions and track federal withholdings for your staff or contractors. The platform helps you organize these deductions in your chart of accounts, making it easier to generate reports and meet IRS requirements for nonprofit payroll management.
launch trading trade finance startup icon

Try it yourself. Start your 15 day free trial

No commitment or credit card required.

Frequently Asked Questions

What is federal withholding?

Federal withholding is the amount of money an employer deducts from an employee's paycheck to prepay federal income taxes to the IRS.

How is federal withholding calculated?

It is calculated based on the employee's earnings, tax filing status, and information provided on their W-4 form.

Why is federal withholding important for nonprofits?

Proper withholding ensures IRS compliance and helps employees avoid large tax bills at year-end.

Where can I track federal withholding in Aplos?

Aplos allows you to track and manage federal withholding as part of your payroll and accounting processes for accurate reporting.

What happens if federal withholding isn't handled correctly?

Incorrect withholding can lead to IRS penalties for the organization and unexpected tax bills for employees.