How FIT Taxable Wages Are Calculated (Pay Stub & W-2 Guide)

FIT is an acronym that stands for “federal income tax,” making FIT taxable wages a portion of your earnings subject to this tax. In essence, your employer must withhold a part of your earnings to pay federal tax on your behalf, which will reflect on your pay stub and Form W-2.

In this article, we’ll explain exactly what FIT taxable wages are, and we’ll show you how they are calculated. We’ll also see who’s exempt from FIT, what the differences are compared to other taxable wages, and how important this item is on a pay stub and Form W-2.

What Are FIT Taxable Wages?

FIT taxable wages are earnings that are subject to federal income tax. These are adjusted wages used to calculate the amount an employer needs to withhold from an employee’s paycheck and remit to the IRS.

As a result, federal income tax wages are not to be confused with gross wages. The difference in gross pay vs. FIT taxable wages comes down to the deductions.

Gross wages represent the total earnings an employee makes, before any deductions have been taken out. On the other hand, to determine the taxable wages for federal income tax, you need to subtract certain deductions and qualified retirement contributions from gross wages.

It’s also important to make a distinction between FIT taxable wages and AGI (adjusted gross income). While both include certain deductions, AGI is determined on Form 1040, after applying above-the-line deductions.

Still, most forms of compensation that employees earn are FIT taxable. This includes salaries and hourly wages, overtime pay, commissions, and bonuses. Tips are also considered taxable income in most cases, and they should be reported for federal income tax purposes.

However, certain pre-tax deductions aren’t subject to FIT, and these include:

• Pre-tax health insurance premiums, where contributions (to health, dental, and vision plans) are made under a qualified employer plan

• Retirement contributions to traditional 401(k), 403(b), or SIMPLE IRA (note that contributions to Roth 401(k) are made with after-tax dollars and are not excluded)

• Health Savings Account (HSA) pre-tax contributions made through payroll

• Flexible Spending Accounts (FSA) contributions

Who Has to Pay FIT?

Most employees who earn income by working in the United States have to pay FIT. This applies not just to citizens and resident aliens but also to many non-resident aliens working on visas (e.g., H-1B or H-2B visa workers), as well.

Employers are legally required to withhold federal income tax from employees’ paychecks based on the information they provide in Form W-4 and the FIT rates and brackets established by the IRS.

Independent contractors also have to pay FIT; however, since they don’t have employers and W-2 taxable wages, they won’t have FIT withheld from their paychecks. Instead, they’ll pay it directly, since they are responsible for self-employment taxes.

How Are FIT Taxable Wages Calculated?

FIT taxable wages are calculated by subtracting the necessary deductions from an employee’s gross wage. It’s a two-step process that goes as follows:

1. Start with gross pay. This encompasses the total earnings an employee made during the pay period. This figure represents the starting point when calculating FIT taxable pay. It encompasses an employee’s hourly wage or salary, overtime pay, bonuses and commissions they earned, holiday pay, taxable fringe benefits, and so on.
   
   
2. Subtract pre-tax deductions. Once you have gross pay, you need to subtract the earnings that aren’t subject to federal income tax. This includes the aforementioned deductions, such as HSA and FSA contributions, as well as pre-tax retirement contributions and health insurance premiums.

Once you determine FIT taxable wages, you can calculate federal income tax withholding. This is done by using IRS-provided tables and formulas and taking into account the employee’s Form W-4, filing, and dependent status.

Federal income tax is calculated using a marginal tax rate, which means the rate increases the more you earn. The rates are subject to change, which is why you should regularly check the IRS website and publications to ensure you’re using updated figures.

As of 2025, tax rates for individual taxpayers filing single are as follows:

It’s important to note that you’re not taxed at the highest rate on the entirety of your income. Instead, each time you move into a higher bracket, you only pay that rate on the part of your income that’s in that bracket.

Who Is Exempt From FIT Taxable Wages?

While many employees and professionals who earn income need to pay federal income tax, there are certain situations in which people are exempt from calculating FIT taxable wages and paying the tax.

Some of the reasons for which you may be exempt from paying this tax include:

• Low employee income level. If an employee’s gross income is very low, once deductions and credits are applied, they might owe little or no federal income tax. This also depends on their filing status. Moreover, the numbers can change each year, so it’s important to stay updated on the filing thresholds.

• Low-income retirees. Individuals who are 65 years of age or older and retired only on Social Security income might not have to pay FIT taxes.

• Non-profit organization. 501(c)(3) organizations are exempt from many taxes, including FIT. However, it’s important to keep in mind that employees of these organizations are typically required to pay federal income tax.

• Certain individuals with disabilities. Not all disability benefits are taxable. Depending on the type of benefit and other income, the person may pay very little in federal income tax, or nothing at all.

It’s also important to note that an employee may be exempt from federal income tax on their Form W-4. However, that only means the employer won’t withhold it from their paycheck, and not that the employee won’t owe FIT at all.

Difference Between FIT Taxable Wages and Other Taxable Wages

FIT taxable wages are different from other taxable wages, since each type of tax has its own set of rules, rates, and brackets.

One of the biggest differences between FIT and other taxable wages is that federal income tax uses a progressive tax system that’s highly variable and depends on filing status and deductions. As a result, when employers withhold this tax from an employee’s paycheck, they are withholding an estimate.

The exact tax is determined at the end of the year, when an employee finds out whether there’s been an over-withholding or under-withholding. Based on that, they will either be eligible for a tax refund or they’ll receive a tax bill to pay the remainder.

FIT also encourages spending and investing in retirement and healthcare, since those contributions offer a direct reduction in taxable income.

When comparing FIT taxable wages to state income taxable wages, there are some similarities. In many states, the wages are calculated in the same manner, but the rates are different.

Some states have flat tax rates (e.g., 2.5% in Arizona or 4.65% in Utah), while others have adopted the progressive tax system similar to the federal one. There are also states with no income tax.

Social Security and Medicare (FICA tax) wages are different from FIT taxable wages in deductions. Retirement contributions aren’t deducted from gross pay when determining the taxable wage for FICA.

Moreover, tax rates are fixed for both Social Security and Medicare, with the employer and employee each paying half. The total tax rate for Social Security is 12.4% (6.2% rate per party), while the Medicare tax rate is 2.9% (1.45% rate per party). There’s also a wage base limit for Social Security tax ($176,100 in 2025), but not for Medicare.

The Importance of FIT Taxable Wages for Your Pay Stubs and W-2

FIT taxable wages are important for your pay stubs and Form W-2, as they help determine how much will be taken out of your paycheck and affect your tax return. Since FIT calculation isn’t based on your gross wage, using it when filing your tax return will likely lead to inaccuracies, potentially resulting in audits or penalties.

In most cases, FIT taxable wages on your W-2 will be shown in Box 1 (Wages, tips, and other compensation). This will typically be lower than your total wages due to exclusions.

Keep in mind that federal income tax doesn’t have a flat rate. As a result, applying a flat percentage to the correct taxable wage can also result in inaccurate calculations. Instead, the progressive tax system used means that the amount withheld needs to be based on where your current earnings fall within the tax bracket.

As you earn more, you’ll move into higher brackets and a larger percentage of your paycheck will be withheld.

All of this will be reflected on your pay stubs, enabling you to keep track of the withholdings throughout the year. That way, you can catch any mistakes early and rectify them before they turn into potentially bigger issues when filing your year-end tax return.

For example, you may notice that health insurance premiums are deducted from your net pay instead of your gross pay. This can lead to your FIT taxable wage being higher than necessary, resulting in over-withholding.

Ultimately, you should regularly review your pay stubs, keeping track of your earnings throughout the year and being mindful of the deductions and a progressive tax rate.

How Paystub.org Helps You Track FIT Taxable Wages

Paystub.org can help you track FIT taxable wages with our professional and easy-to-use software for document generation. We offer both:

• Pay stub generator
• Form W-2 generator

The tools come with built-in calculators and autocomplete features, which minimize the risk of making mistakes associated with manual data entry. Our generators will automatically calculate gross and net salary based on the rates, hours, and deductions that you include. They also account for the employer’s and employee’s state, applying relevant rates and taxes.

This allows you to create consistent tax and payroll documentation in minutes while ensuring accuracy and compliance. Plus, you don’t have to stay updated with the latest regulatory changes regarding pay stubs and Form W-2, as our software does it for you.

Final Thoughts

Knowing what FIT taxable wages are and how they are calculated is invaluable for both employers and employees. It helps employers withhold the right amount from their employees’ paychecks and allows workers to better prepare when filing their tax return and anticipate whether they are due for a tax bill or a refund.

It’s also important to make a distinction between FIT taxable wages and MAGI, AGI, gross pay, and other taxable wages; they all serve different purposes and are calculated using different deductions and formulas. That’s why we recommend our Form W-2 and pay stub generators, which make these calculations for you and help you create these documents effortlessly!

FIT Taxable Wages FAQ

#1. How are FIT taxable wages different from gross pay?

FIT taxable wages are lower than gross pay, since they don’t include pre-tax deductions. They are calculated by taking an employee’s gross wage and subtracting deductions like health insurance premiums and 401(k) contributions. The number is then used to calculate FIT withholding.

#2. Do pre-tax benefits reduce FIT taxable wages?

Yes, pre-tax benefits reduce FIT taxable wages. Contributions to qualified Section 125 plans (so-called “cafeteria plans”), like medical and dental insurance, HSA and FSA contributions, and retirement plan contributions, all reduce the amount of income that is subject to federal income tax.

#3. How do bonuses affect FIT taxable wages?

Bonuses affect FIT taxable wages by increasing them, since they are considered supplemental wages. Depending on the bonus and how it’s paid, employers can withhold it at a flat 22% rate or use the aggregate method.