How to Calculate Payroll Taxes: A Step-by-Step Guide

Calculating your workers’ gross pay is simply step one within the prolonged technique of operating payroll. Employers should additionally calculate, withdraw, maintain in belief and file payroll taxes, then present each the IRS and workers with the right tax-filing paperwork on a daily schedule.

Utilizing the correct payroll software program can dramatically simplify payroll processing whereas lowering your threat of creating pricey payroll errors. With a number of free or low cost payroll software program choices, it’s pretty straightforward for enterprise homeowners to search out an automatic payroll service.

Nevertheless, whether or not you’d wish to know extra about calculating payroll taxes usually otherwise you need to attempt operating payroll by hand, our basic overview may also help you get began.

Bounce to:

What are payroll taxes?

“Payroll taxes” is a broad time period for taxes employers deduct and file on behalf of their workers. It may possibly additionally embrace taxes employers are required to pay on their very own that relate to what number of workers they’ve and what these workers are paid.

Our information to payroll taxes delves deeper into the specifics of every sort of payroll tax, however right here’s a fast overview earlier than we soar into manually calculating payroll:

• Federal earnings taxes are taxes workers pay on all taxable earnings.
• FICA taxes (Federal Insurance coverage Contributions Act taxes) embrace each the employer and worker half of Medicare and Social Safety taxes.
• FUTA taxes (Federal Unemployment Tax Act taxes) are taxes paid by employers solely.
• SUTA taxes are state unemployment taxes paid by companies (not workers) in most states.
• Some states and native municipalities cost taxes as effectively, akin to a state earnings tax.

SEE: When Are Payroll Taxes Due? (TechRepublic)

Methods to manually calculate payroll taxes

Whereas employers can calculate payroll by hand utilizing the IRS’s federal earnings tax withholding tables, a paycheck calculator or a spreadsheet template, operating payroll manually is time consuming. It could additionally improve your threat of creating inaccurate paycheck calculations, which might expose what you are promoting to lawsuits, IRS fines and different penalties.

Our information under is a basic payroll tax overview, however we strongly suggest speaking along with your accountant, bookkeeper, tax skilled or different monetary advisor earlier than you run payroll for the primary time.

Calculate gross pay

Earlier than you may make essential deductions from worker paychecks, you have to calculate the overall quantity of compensation every worker earned over the course of the pay interval.

For hourly staff, this sometimes means multiplying hours labored by the speed of pay. (Don’t overlook to account for any extra time hours labored at a better price of pay together with any commissions, ideas or bonuses.)

For salaried staff, calculating gross pay often means dividing an worker’s annual compensation by the variety of pay durations within the 12 months:

• In case you pay workers weekly, divide by 52 (for a typical 12 months) or 53 (for a intercalary year).
• In case you pay workers bi-weekly (each different week), divide by 26.
• In case you pay workers semi-monthly (twice a month), divide by 24.
• In case you pay workers as soon as per 30 days, divide by 12.

Calculate federal earnings tax withholding

The amount of cash you withhold for federal earnings tax is dependent upon every worker’s earnings, plus the data they give you on IRS Type W-4.

Employers are required to gather Type W-4 (also referred to as the worker’s withholding certificates) from all conventional workers after they’re employed. Staff might modify their W-4 withholding info all year long.

Your workers will fill out the next info on Type W-4:

• Step 1: Taxpayer info, together with identify, tackle, Social Safety quantity and tax-filing standing (single, married submitting collectively, head of family or married submitting individually).
• Step 2: Extra sources of earnings, together with self-employment earnings or earnings from a partner’s job.
• Step 3: Tax credit primarily based on dependents, if any.
• Step 4 (non-obligatory): Extra changes to earnings tax withholding quantities.

From there, you’ll flip to IRS Publication 15-T, which outlines the 2 principal strategies of creating earnings tax withholding calculations: The wage bracket technique and the share technique.

Usually, you’ll use the wage bracket technique discovered on web page 12 to manually calculate tentative withholding quantities for staff making $100,000 or much less per 12 months. For workers who make greater than $100,000, you’ll use the share technique discovered on web page 56.

Calculate FICA taxes

Not like federal earnings taxes, which differ between workers, FICA taxes are charged at a flat price, which makes them simpler to calculate:

• The Social Safety tax price is 6.2%.
• The Medicare tax price is 1.45%.

Social Safety taxes might solely be charged on the primary $160,200 of an worker’s annual wages. In distinction, there isn’t a earnings cap for Medicare taxes, although people making greater than $200,000 a 12 months are topic to an extra Medicare tax of 0.9%.

Be aware that as an employer, you’re required to match your workers’ Social Safety and Medicare taxes. (Employers don’t have to match extra Medicare taxes for higher-paid staff.)

Calculate state and native tax withholding

If the state the place your workers work prices an earnings tax, you’ll want to finish a course of just like the one you adopted to search out tentative earnings tax withholding quantities. Every space has its personal state-specific tax legal guidelines, so that you’ll want to search out your state’s laws to calculate any state tax deductions.

Make different payroll deductions

If a portion of your worker’s wages go towards healthcare premiums, charities, retirement funds or different causes, be certain that to deduct these earlier than signing off on their paycheck.

Calculate web pay

When you’ve calculated your worker’s gross pay and made all the suitable deductions, you’re left with their web pay, or take-home quantity. Most workers in the present day obtain their pay by way of direct deposit, although paper checks and pay as you go debit playing cards stay standard alternate options.

Calculate FUTA and SUTA taxes

Staff don’t contribute to both FUTA or SUTA taxes, however the amount of cash you as an employer contribute to every fund is predicated on the variety of workers you have got and the way a lot they earn.

FUTA taxes are equal to six% of the primary $7,000 of an worker’s wages. Nevertheless, for those who additionally pay unemployment taxes on a state stage, you may qualify for a 5.4% FUTA credit score, which lowers your FUTA tax price to 0.6%.

SUTA tax charges and wage bases differ from state to state, so that you’ll have to search for your state’s particular tax legal guidelines to determine whether or not you pay SUTA taxes and, if that’s the case, how a lot.

Different choices for calculating payroll taxes

Whereas it’s useful to know the way payroll tax calculations work, it’s extraordinarily difficult to do them accurately by hand. Thankfully, a number of different choices can simplify tax calculations and submitting:

• Payroll spreadsheet templates for applications like Excel or Google Sheets ought to include pre-filled cell formulation that precisely calculate and report payroll taxes.
• Free paycheck calculators may also help you pay hourly and salaried staff accurately in each state.
• Payroll software program calculates paychecks and taxes, pays workers (often by computerized direct deposit), syncs with accounting software program and offers workers legally required pay stub entry.
• An in-house bookkeeper or digital accounting firm can run payroll and file taxes in your behalf.
• Outsourced PEO firms can deal with each payroll and basic HR providers by turning into authorized co-employers with what you are promoting.

Apprehensive about price? Most payroll software program firms supply free trials between 30 days (SurePayroll and OnPay) and three months (ADP). Our full information to payroll software program can inform you extra about the right way to discover the correct payroll program in your wants and price range.

Often requested questions

What’s the worker payroll tax?

Worker payroll taxes embrace the federal earnings tax, which varies primarily based on particular person or family earnings (in addition to different components). Staff additionally pay FICA taxes (Social Safety tax and Medicare tax) at a flat price of seven.65% for the 2023 tax 12 months.

How do I manually calculate payroll taxes?

Manually calculating payroll taxes is a multi-step course of:

1. Calculate an worker’s gross pay.
2. Deduct federal earnings taxes primarily based on the worker’s Type W-4 and the IRS’s tax withholding tables.
3. Deduct FICA taxes (Social Safety and Medicare taxes) at a price of seven.65%.
4. Deduct any state or native taxes, which have variable charges dependent in your location.

When you can calculate payroll taxes by hand, we suggest utilizing a extra dependable, much less time-consuming technique. Payroll software program can calculate payroll taxes for you, sometimes at a reasonably inexpensive price, and may scale back your threat of creating pricey payroll tax errors.

How a lot payroll tax is taken out of my paycheck?

The quantity of payroll tax taken out of your paycheck relies upon largely in your earnings. The primary payroll tax deductions embrace federal earnings taxes (variable by particular person), Social Safety taxes (6.2%) and Medicare taxes (1.45%). Relying on the place you reside and work, you may also be topic to a state earnings tax.

Which payroll taxes do employers should pay?

Employer payroll taxes embrace the employer portion of Social Safety taxes and Medicare taxes, which matches the worker’s contribution greenback for greenback. Employers additionally pay FUTA and SUTA taxes, or federal and state unemployment insurance coverage taxes.

Learn subsequent: Methods to Do Payroll: A Step-by-Step Information (TechRepublic)

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