Types of Pay

• Employers are required to tax the pay of all employees. An employee's pay includes wages, vacation allowances, commissions and bonuses. Reimbursements are also considered pay, such as gas and mileage reimbursement.
  
  

Calculating Withholding Tax

• An employee's tax withholding amount is determined by the amount an employee earns and the information he gives on his W-4 form. According to the IRS, the number of withholding allowances an employee claims, whether an employee claims single or married on his taxes and any additional amount the employee requests be held from his paycheck is the information listed on a W-4 form. Updating the W-4 form within 10 days is required whenever any information listed changes.
  
  

Exemptions

• Employees are exempt from tax withholding if the employee had no tax liability and expects a refund of all federal tax for the current year, or was entitled to a refund for the prior year.