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How to Calculate Payroll Taxes?

Calculating payroll taxes can be a difficult task for a small business owner. It means total wage expenses for the employer and net income for the employee, among others. You have to know what payroll taxes include to ensure you make the right calculations. State and federal payroll taxes, social security taxes, and health insurance taxes.

Payroll Taxes: A Step-by-step Guide


1. Require Employees to Complete a W-4

Require Employees to Complete a W-4 | How to Calculate Payroll Taxes?

A Form W-4 helps the employer to calculate the right federal withholding taxes from his employees. It also contains information about the employees and their respective spouses and children, if applicable. The authorities recommend updating the form annually, especially when their personal or financial situation changes.

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2. Collect Information for Federal Tax Withholdings

Collect Information for Federal Tax Withholdings | How to Calculate Payroll Taxes?

Determine the employee’s gross pay. This includes hourly wages, bonuses, and fringe benefits. Using the information provided in the Form W-4, locate the employee’s status (single, married, et cetera) and his allowances. This information will determine your tax withheld from the gross income.

3. Compute Federal Tax Withholdings Via IRS Withholding Calculator

Compute Federal Tax Withholdings Via IRS Withholding Calculator | How to Calculate Payroll Taxes?

Determine the correct withholding amount via the IRS withholding calculator. There, you will be asked to enter information including the employee’s status, gross wages, and frequency of payment (weekly, bi-monthly, monthly, et cetera). You will also be required to identify year-to-date federal withholding payments. IRS publication 15 details how to calculate the withholdings.

4. Determine Social Security Withholding

Social security is a federal program that furnishes retirement and disability income through tax withholdings. According to the IRS, this year’s social security is 6.2% of the employee’s gross income while the wage base limit is $127,200. So, employees must pay social security until they reach the wage base limit.

5. Identify Medicare Withholding

Identify Medicare Withholding | How to Calculate Payroll Taxes?

Medicare furnishes medical coverage for the elderly and disabled through payroll tax withholdings. According to the IRS, this year’s Medicare withholding is 1.45% for the employer and 1.45% for the employee, totaling to 2.9%. There is no wage base limit for this type of withholding. But, single employees earning over $200,000 annually is required to pay 0.9% on top of the regular Medicare withholding. Meanwhile, married employees have a $250,000 threshold, if the couple is filing jointly.

6. Incorporate Other Applicable Deductions

Incorporate Other Applicable Deductions | How to Calculate Payroll Taxes?

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There are deductions that help reduce the amount of taxes due. These include contributions to retirement plans like a 401(k) plan for-profit companies or 403(b) plan for non-profit companies. In these plans, employees are allowed to contribute more to their retirement plans and, in turn, collect more retirement balance.

7. Identify State Withholding Taxes

Identify State Withholding Taxes | How to Calculate Payroll Taxes?

After calculating the federal withholding taxes, proceed to calculate the state withholding taxes. Remember, each state has different tax guidelines and each employee is governed by his own local tax laws. So before you start computing for taxes, gather all necessary data first.

8. Report and Pay the Tax Withholdings

Report and Pay the Tax Withholdings | How to Calculate Payroll Taxes?

When reporting and paying for your employees’ tax withholdings, remember to use the appropriate tax form for each payroll tax. There are also different systems for each type of tax. The majority of tax authorities now allow electronic payments so you might want to consider doing that to ease the burden.


Karin Hutchinson shares a visual walkthrough on calculating payroll taxes:

If you are keen on calculating your own payroll taxes instead of hiring a third party, reading up on some guidelines can substantially help you. Familiarize yourself with the rules and regulations mandated by the government. Also, collect all necessary information about your employees so you know exactly what to add or deduct from their gross income.

Did you find this walkthrough informative? Let us know your thoughts in the comments section below.

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