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Federal income tax withholding on military pay follows the rules in IRS Publication 15-T, Federal Income Tax Withholding Methods. The employer (DFAS) computes withholding each pay period based on the member's Form W-4 elections — filing status, number of dependents, additional withholding, and any pre-tax deductions like Traditional TSP — using either the Percentage Method or the Wage Bracket Method described in Pub 15-T.

Only taxable wages are subject to withholding. In military pay, basic pay and most special / incentive pays are taxable; allowances such as BAH, BAS, DLA, MALT, per diem, TLE, OHA, overseas (OCONUS) COLA, and clothing allowance are non-taxable per IRS Publication 3 and 26 U.S.C. § 134. CONUS COLA is the exception — it is taxable and appears on the W-2 (DoD FMR Vol. 7A Table 44-4, Note 12).

Service members pay FICA on basic pay only. Under 26 U.S.C. § 3121(i)(2), "wages" for a member of the uniformed services means basic pay — so special and incentive pays and bonuses are subject to federal income tax but are not Social Security or Medicare wages. Social Security is 6.2% up to the annual wage base published by SSA; Medicare is 1.45% with no wage cap. Members with wages above the Additional Medicare threshold owe an extra 0.9% on the excess, administered under IRC § 3101(b)(2).

Per 26 U.S.C. § 112 and IRS Publication 3, enlisted members and warrant officers who serve any part of a month in a designated combat zone may exclude military pay earned during that month from federal gross income. Commissioned officers may exclude up to the highest rate of enlisted pay plus any Hostile Fire / Imminent Danger Pay. Designated combat zones are established by Executive Order and listed by the IRS.