When must withholding occur?

You must know when and how to withhold federal income tax, Social Security, and Medicare. The discussion that follows takes you through the basics of payroll withholding.

Federal income tax, Social Security, and Medicare are withheld from wages when they are actually or constructively paid.

The value of a personal exemption is $3,500 for 2008.

The flat federal income tax withholding rate for supplemental payments remains 25% for 2008.

For 2008, the maximum earned income credit (EIC) amount that may be paid in advance to an employee is $1,750.

Actual or constructive payment. Federal income tax, Social Security, and Medicare are withheld from wages when the wages are actually or constructively paid. Actual payment occurs when an employee is put in possession of wages, such as when given cash or a check. Constructive payment occurs when wages are set aside for an employee. The payment can be credited to the employee's account or otherwise made available to the employee at any time. To be available to the employee at any time, the wages must be credited or set apart without any substantial limitation or restriction on the time or manner of their payment. There cannot be conditions under which the payment will be made. Actual or constructive receipt must occur during a return period.

This means that you cannot pay your employees their gross wages for the first three or four weekly payroll periods in a month and then deduct the full amount of tax that should have been withheld over the course of the month from the last paycheck of the month.