Learning how to calculate payroll taxes can sound like an overwhelming process for employers. To make matters more complicated, not every employee will be the same. You must account for different wages, different withholdings and other special factors.
Payroll may seem like a burden that you want to avoid for as long as possible, but you can fortunately simplify. We’ve broken down everything you need to know on how to calculate payroll taxes into a simple, step-by-step guide.
What Are Payroll Taxes?
It’s important for you to know what payroll taxes are in order to show you how to calculate them.
By definition, taxes are a financial charge by the government that is collected and used to fund government spending and public expenditures. This includes payroll taxes, individual income, corporate (business), property tax, etc. We pay taxes on what seems like just about everything.
As an employer or somebody who is self-employed, payroll taxes are one of the many kinds of taxes your business pays. As soon as you have employees or employ yourself, you become responsible for them.
Payroll taxes are the financial charge paid on the wages and salaries of (yourself or) your employees. Just like all other taxes, they are used to fund government spending, but specifically, they are used to finance social insurance programs.
You’ll need to calculate four types of payroll taxes: federal income, Social Security and Medicare (FICA) and federal unemployment (FUTA).
How to Calculate Payroll Taxes
Once you understand what payroll taxes are and why they matter, the tricky part is learning how to calculate them. Here, we will cover how to calculate each type:
Income Tax
Every employee at your business is required to fill out a W-4 form upon hire (1099 Form for anyone self-employed). This is the key to simple income tax calculations because the employees can select options that will determine the withholding amount from each check for state and federal taxes.
For State Income Tax:
1. Determine the amount an employee (or you) wants to be withheld from their wages.
2. Remit these withholdings as part of your payroll taxes.
Easy, right? Federal Income Tax is a little more complicated than that.
For Federal Income Tax, you can use either the Percentage Method or the Wage Bracket Method. If you’re not using a tax accountant for your payroll taxes, it’s highly recommended that you do not try using the Percentage Method. Mistakes can easily be made, especially if you’re just learning how to calculate payroll taxes.
Here, we use the Wage Bracket Method:
1. First you need to find, for that specific pay period, where your employee stands on the Wage Bracket Percentage Table provided by the IRS. Locate and use the table corresponding to your employee’s pay period.
2. Check the employee’s W-4 to determine how they file, i.e., single or married, and how many allowances they have.
3. Find the gross wage in column A and B of the Wage Bracket Percentage table. Tip: The wage should be more than the amount in A and less than the amount in B.
4. Subtract the amount found in Column C.
5. Multiply the answer by the percentage found in Column D.
6. Double-check the W-4 to make sure the employee doesn’t request additional withholdings. If they do, simply add that amount to the final number.
After this process, the resulting number will be the amount you should withhold from your employee’s wages and remit for federal income taxes.
FICA (Federal Insurance Contributions Act) Tax
FICA taxes fund the Social Security and Medicare plan. They are a shared expense between the employer and the employee, so unfortunately if you’re self-employed you’re responsible for the entire charge. Here’s how to calculate FICA:
1. Determine the gross income for the pay period for the employee as well as your business’s gross income for the pay period. This is the basis of finding out how much you’ll need to pay out of pocket and how much will be remitted from your worker.
2. The employer portion is 6.2% for Social Security. Multiply the gross income by this percentage (gross x 0.062).
3. The employer portion is 1.45% for Medicare. Multiply the gross income by this percentage (gross x 0.0145).
You and your employee are each making a payout of 7.65% for FICA taxes. Combined, that’s 12.4% for Social Security and 2.9% for Medicare.
You’ll also need to submit a Form 941 quarterly for FICA taxes.
FUTA (Federal Unemployment) Tax
Unlike FICA, FUTA taxes are strictly employer-paid payroll taxes. They are used to fund state workforce and unemployment agencies. The tax rate on FUTA is 6% on the first $7,000 paid to employees in a calendar year. Each state is given a credit of 5.4%, so the actual rate an employer must pay is 0.6%. Some states even receive a full credit, so be sure to check if your state is eligible.
The process for FUTA taxes follows the same general guidelines as FICA:
1. Determine if the wages paid to your employees exceeds $7,000.
2. If it does, multiple the wages by 0.6% (7,000 x 0.006).
The resulting number is the amount of Federal Unemployment Tax that you need to remit. You’ll also need to submit a Form 940 at the end of each calendar year for FUTA taxes.
Making Payroll Tax Payments
We’ve covered how to calculate payroll taxes, and now that you’ve crunched all the numbers, it’s time to submit your payments. Fortunately, the ease of calculating your taxes pales in comparison to the ease of paying them.
All you need to do to submit your payroll taxes is enroll in the Electronic Federal Tax Payment System (EFTPS). It’s the only way to submit a payment since mailing a check is no longer an option.
And There You Have It
If you’re ever unsure about anything with your taxes, it’s strongly suggested that you reach out to a CPA or tax expert for assistance. Learning how to calculate payroll taxes might be intimidating, but with these user-friendly steps, you’ll be a pro in no time!
