Easy Step-by-Step Guide to Calculating Payroll Taxes

Payroll taxes are a crucial part of running a business. Not only do they ensure that employees are properly compensated for their work, but they also help to fund important social programs like Medicare and Social Security. Calculating payroll taxes can be a complex task, but it is essential for ensuring that your business remains compliant with the law.

Failure to properly calculate payroll taxes can result in significant penalties from the IRS. By taking the time to understand how to calculate payroll taxes, you can ensure that your business is compliant with the law and that your employees are getting the benefits they're entitled to.

There are a number of different factors that must be taken into account when calculating payroll taxes, including the type of employee, the number of hours worked, and more. To help you with that, we present you with an easy step-by-step guide on payroll taxes. With that said, let’s begin.

What Are Payroll Taxes?

Most people are familiar with income taxes, but payroll taxes are another important type of tax that is often deducted from paychecks. Payroll taxes are used to fund Social Security and Medicare, and they are typically divided between employees and employers.

Employees usually pay 6.2% of their wages in payroll taxes, while employers match this amount, for a total of 12.4%. Self-employed individuals are responsible for the entire 12.4% themselves.

In addition to funding Social Security and Medicare, payroll taxes also support other programs like unemployment insurance and disability insurance.

Why Do You Need To Calculate Payroll Taxes?

Businesses are required to withhold payroll taxes from their employees' wages, and then remit those taxes to the government on a regular basis. Payroll taxes can be a significant expense for businesses, so it's important to understand how they are calculated. There are few other reasons why it's important to calculate payroll taxes correctly.

  • When you withhold too little tax from an employee's paycheck, the employee may owe a large tax bill at the end of the year.
  • If you withhold too much tax from an employee's paycheck, the employee may be due a refund when they file their tax return.
  • If employers don't remit the taxes they withhold to the government, they may be subject to penalties and interest.

Taxes You Need To Calculate To Process Payroll Correctly

In order to process the payroll accurately, make sure you calculate the following taxes.

1. Federal Income Tax (FIT)

The Federal Income Tax, or FIT, is a tax levied by the federal government on the income of individuals, households, and businesses. It is used to finance the government's activities and pay for public goods and services. The rate of taxation varies depending on the amount of income earned and the type of income.

To calculate the FIT, taxpayers must first determine their taxable income. This can be done by subtracting deductions from gross income. Deductions can include things like charitable contributions, mortgage interest, and state and local taxes. Taxpayers then multiply their taxable income by the tax rate to determine their tax liability.

The FIT is an important part for learning how to calculate payroll tax expense as it helps to ensure that employees are correctly withholdings taxes from their paychecks. Withholding the correct amount of taxes helps to avoid underpayment or overpayment of taxes.

It also helps to ensure that employees do not owe money to the government at the end of the year. To calculate withholding correctly, employers must have a good understanding of the Fit. They must also keep up-to-date on any changes to the tax code so that they can make sure they are withholding correctly.

2. Social Security Tax

When running payroll, it is important to correctly calculate Social Security tax. This tax funds the Social Security program, which provides retirement benefits, disability insurance, and survivor's benefits. The amount of Social Security tax that an employee owes is based on their income.

For 2022, the Social Security tax rate is 6.2%, and the wage base limit is $137,700. This means that employees will only be taxed on the first $137,700 of their income. The employer also pays a matching Social Security tax, for a total of 12.4%. Withholding Social Security tax from employee paychecks ensures that they will have the necessary funds to receive benefits later in life.

3. Medicare Tax

Medicare taxes are a type of payroll tax imposed by the federal government on workers' earnings. The Medicare tax is used to fund the Medicare program, which provides health insurance coverage for seniors and some disabled individuals. Employers are required to withhold the Medicare tax from their employees' wages and to pay a matching amount themselves.

If you are an employer, you need to withhold Medicare taxes from your employees' wages and pay a matching amount yourself in order to properly calculate payroll.Employees who earn more than $200,000 per year are subject to an additional 0.9% Medicare tax on the amount over $200,000.

This additional tax is imposed on both the employee and the employer. If you are an employee, you need to be aware of this additional tax so that you can correctly calculate your take-home pay.

The Medicare tax is just one of several payroll taxes that you need to withhold from your employees' wages. Other payroll taxes include Social Security taxes and federal and state income taxes. Withholding the correct amount of taxes from your employees' wages is essential in order to properly calculate payroll.

If you withhold too little, you may be subject to penalties and interest charges. Withholding too much can cause hardship for your employees. In either case, it is important to consult with a qualified accountant or payroll specialist in order to ensure that you are correctly calculating payroll.

4. State Income Tax (Sit) (If Applicable)

There are two types of taxes that are withheld from an employee's paycheck: federal and state. Federal income tax is required to be withheld from all employee paychecks, regardless of the state in which they reside. State income tax is only required to be withheld from employees who live in states that have a state income tax.

Sit is calculated using the employee's taxable income, which is their total income minus any deductions or exemptions. The amount of Sit that is withheld from each paycheck will depend on the employee's taxable income and how much they owe in taxes for the year. Sit is used to fund state-level services such as education and infrastructure.

Employers are required to withhold Sit from their employees' paychecks and remit it to the state government on a regular basis. Sit is an important part of payroll processing because it must be correctly calculated in order to ensure that employees are not under- or over-taxed. Furthermore, employers who fail to withhold Sit may be subject to penalties.

5. Local Income Tax (If Applicable)

When you withhold local income tax from your employees' wages, you are paying the taxes owed to their city or locality. The amount of tax withheld is based on the employee's withholding status and the number of exemptions they claim.

The local income tax is in addition to the federal and state income taxes that are withheld from an employee's paycheck. If your business is located in a city or locality that imposes a local income tax, you will need to withhold the tax from your employees' wages and remit it to the municipality.

You will also need to obtain a local business license and remit the tax to the locality on a quarterly basis. It is important to be aware of the local income tax laws in your area to process payroll correctly. If the wrong tax rate is used, the employee may end up owing money to the locality come tax time.

Conversely, if too much tax is withheld, the employee will be due a refund. To avoid either scenario, it is essential that businesses take the time to calculate local income tax correctly and understand how to calculate payroll taxes before processing payroll.

What Do You Need Before You Run Payroll?

It takes a lot of time and effort to run payroll. Let's take a step by step look at them.

1. Form W-4: Employee’s Withholding Certificate

As an employer, you are responsible for withholdings payroll taxes from your employee's wages. To do this, you will need to have a Form W-4: Employee's Withholding Certificate on file for each employee. The Form W-4 tells you how much tax to withhold from each paycheck based on the employee's tax filing status and allowances.

The employees themselves are responsible for completing the Form W-4. They can access the form online or request a paper copy from their local IRS office. Once the employee has completed the form, they should give it to you, the employer. It is important to keep accurate records of all Forms W-4 on file in case of an audit.

If an employee does not provide you with a Form W-4, you are still responsible for withholdings taxes from their wages. You will need to withhold at the highest tax rate (Single with 0 allowances) until you receive a completed Form W-4 from the employee.

It is important to note that the amount of taxes withheld may not match the amount of taxes actually owed at the end of the year. Employees can use the Form W-4 to make sure that they do not have too much or too little tax withheld from their paycheck throughout the year. They can make changes to their withholding by completing a new Form W-4 at any time.

2. State W-4 (As Applicable)

The State W-4 form is used to calculate the amount of state taxes that should be withheld from an employee's paycheck. The employee will need to fill out the form and provide it to the employer.

The employer will then use this information to ensure that the correct amount of state taxes is withheld from each paycheck. Without the State W-4 form, the employer would not be able to correctly withhold state taxes from their employees' paychecks.

3. Direct Deposit Authorization Form

The Direct Deposit Authorization Form is required for all businesses that want to offer direct deposit as a payment method for their employees. This form must be filled out by the employee and approved by the employer prior to running payroll.

The information on the form includes the employee's bank account number and routing number, as well as the amount of money that should be deposited into the account each pay period.

By filling out this form, the employee is authorizing the employer to electronically transfer their paycheck into their bank account. This process is safe and secure, and it helps to ensure that the employee will receive their paycheck on time. In addition, it eliminates the need for the employer to print and physically distribute paper paychecks, which can save time and money.

4. Form I-9: Employment Eligibility Verification

As an employer, you are responsible for ensuring that your employees are legally authorized to work. The Form I-9 is used for this purpose. Employment eligibility must be verified for every new employee, regardless of citizenship status.

The penalties for not complying with I-9 requirements can be severe. You may be fined up to $16,000 per employee for each violation. Additionally, you may be subject to criminal charges if you knowingly hire or continue to employ unauthorized workers. Therefore, it is essential that you take the time to properly complete the Form I-9 before running payroll taxes.

How To Calculate Employee Payroll Taxes?

There are two types of payroll taxes: federal and state. The amount of tax withheld from each paycheck depends on how much money the employee earns, as well as their filing status and number of allowances.

To calculate federal payroll taxes, you'll need to use the IRS withholding tables. These tables can be found in Publication 15 (Circular E), which is available on the IRS website. To calculate state payroll taxes, you'll need to check with your state's tax agency. Once you have the correct withholding tables, follow these steps:

Step 1: Figure Out Gross Pay

The first step in calculating employee the employee taxes is to finding the gross pay for hourly and salaried employees.

1. For Hourly Employees

To calculate gross pay for an hourly employee, multiply the number of hours worked by the hourly wage. For example, if an employee works 40 hours per week and makes $15 per hour, their gross pay would be $600 per week ($15 x 40 hours).

2. For Salaried Employees

To calculate gross pay for a salaried employee, divide the annual salary by the number of pay periods in a year. For example, if an employee is paid biweekly (every other week), their gross pay would be half of their annual salary. So, if someone earns $50,000 per year, their biweekly gross pay would be $1,923.08 ($50,000 / 26 pay periods).

Step 2: Calculate Employee Tax Withholdings

Once you figure out the gross salary, calculate the employee tax withholdings using the following method.

Federal Income Tax (Fit): 2019 Or Prior

1. Adjust The Employee’s Wage Amount

The first step in calculating FIT is to determine the employee's taxable wages. This is their gross pay minus any pretax deductions, such as for health insurance or a 401(k) plan. For example, if an employee has gross pay of $600 per week and they have $100 deducted from their paycheck for health insurance, their taxable wages would be $500 per week ($600 - $100).

2. Figure The Tentative Withholding Amount

Once you know the employee's taxable wages, you can use the IRS withholding tables to figure out the tentative withholding amount. This is the amount of federal income tax that should be withheld from each paycheck.

The IRS withholding tables are based on the employee's taxable wages, filing status (single, married, etc.), and the number of allowances they claim. The more allowances an employee claims, the less tax will be withheld from their pay.

3. Account For Tax Credits

The next step is to account for any tax credits the employee may be entitled to. Credits can lower the amount of tax owed, and in some cases, may even result in a refund. There are many different types of credits available, including the Earned Income Credit (EIC), Child Tax Credit, and American Opportunity Tax Credit.

4. Figure The Final Amount To Withhold

After taking into account any tax credits, the final step is to figure out the amount of federal income tax to withhold from the employee's paycheck. This is done by subtracting the total credit amount from the tentative withholding amount.

For example, let's say an employee has taxable wages of $500 per week, a filing status of single, and two allowances. Based on the IRS withholding tables, the tentative withholding amount would be $52.50 per week ($500 x 10%). However, if the employee is entitled to a $100 tax credit, the final amount to withhold would be $47.50 ($100 - $52.50).

Federal Income Tax (Fit): 2020 Or Later

1. Adjust The Employee’s Wage Amount

Calculating FIT 2020 or later begins with determining the employee's taxable wages. It is their gross income minus any pretax deductions, such as 401(k) and health insurance. Let’s take the FIT 2019 or prior example, assuming an employee make $600 per week grossly with $100 deducted for health insurance, their taxable income would be $500 per week ($600 - $100).

2. Figure The Tentative Withholding Amount

Using the IRS withholding tables, you can determine the tentative withholding amount based on the employee's taxable wages. Each paycheck should be withheld this amount for federal income tax.

3. Account For Tax Credits

Lets say, the employee is claiming two dependents, each worth $1,000. It makes $1,000 x 2 = $2,000

3b) $2,000 / 24 = $83.33

3c) $ 500 – $83.33 = $416.67

4. Figure The Final Amount To Withhold

Once any tax credits have been taken into account, the final step is to determine how much federal income tax should be withheld from the employee's paycheck. To do this, subtract the total credit amount from the tentative withholding amount.

For example, let's say an employee has taxable wages of $500 per week, a filing status of single, and two allowances. Based on the IRS withholding tables, the tentative withholding amount would be $52.50 per week ($500 x 10%). However, if the employee is entitled to a $100 tax credit, the final amount to withhold would be $47.50 ($100 - $52.50)

FICA Taxes

1. Social Security

The social security tax is a payroll tax that funds the Social Security program. The current social security tax rate is 6.2%, and it's applied to the first $132,900 of an employee's wages (as of 2019). This means that the maximum amount of social security tax that can be withheld from an employee's paycheck is $8,239.80 per year ($132,900 x 6.2%).

2. Medicare

The Medicare tax is a payroll tax that funds the Medicare program. The current Medicare tax rate is 1.45%, and it's applied to all of an employee's wages (there is no wage limit). This means that the maximum amount of Medicare tax that can be withheld from an employee's paycheck is $1,829 per year ($132,900 x 1.45%).

State And Local Taxes

State Income Tax

The amount of state income tax withheld from an employee's paycheck depends on the state in which they live and work. Some states have no income tax, while others have rates ranging from 1% to 13%.

Local Taxes

In some cases, localities (cities, counties, etc.) also have their own income tax. The rate and rules vary depending on the locality, so you'll need to check with your state or local tax authority for more information.

Step 3: Take Care Of Deductions

1. Health Insurance: If you offer health insurance to your employees, you'll need to deduct the cost of their premiums from their paychecks. The amount of the premium will depend on the type of plan you offer and the coverage levels your employees elect.

2. Retirement Plans: If you offer a retirement plan, such as a 401(k), you may be able to deduct employee contributions from their paychecks. For example, if an employee contributes $50 per week to their 401(k), you can deduct that amount from their paycheck before taxes are calculated.

3. Other Deductions: There are many other types of deductions that you may need to withhold from your employees' paychecks, including union dues, charitable donations, and parking fees. Be sure to check with your payroll software or service to see what deductions are available.

Step 4: Add On Any Expense Reimbursements

If you reimburse your employees for any business-related expenses, such as travel or office supplies, you'll need to include those amounts in their taxable income. For example, if you reimburse an employee $50 per week for travel expenses, you'll need to add that amount to their taxable wages when calculating payroll taxes.

Step 5: Total It All Up

Once you comprehend how to calculate wages expense in accounting and takes different factors into account, the final step is to total up the employee's gross pay, deductions, and tax withholdings. This will give you the employee's net pay, which is the amount they will take home with them each pay period.

1. Calculate The Employee’s Net Pay: To calculate the employee's net pay, you will need to subtract all of the deductions and tax withholdings from their gross pay. This will give you the final amount that the employee will take home with them each pay period.

2. Review The Employee’s Net Pay: Once you have calculated the employee's net pay, it's important to review the amount to make sure it is accurate. This can be done by looking at the employee's pay stub or by speaking with their HR representative.

3. Make Any Necessary Adjustments: If you find that the amount of net pay is not accurate, you will need to make the necessary adjustments. This could involve changing the deductions or tax withholdings that are being taken out of the employee's pay. Once the adjustments have been made, you will need to recalculate the employee's net pay.

4. Issue and calculate final paycheck: After you have reviewed and calculated the employee's net pay, you will need to issue and calculate their final paycheck. This can be done by direct deposit or by mailing a paper check to the employee's address.

5. Keep Accurate Records: It's important to keep accurate records of all payroll taxes that are withheld from employee paychecks. This includes the federal income tax, Social Security tax, and Medicare tax. These records should be kept for at least four years.

How To Calculate Employer Payroll Taxes?

Aside from withholding taxes from the employee's pay, one must understand how do I calculate employer payroll taxes.

Fica Matching

Fica taxes are made up of Social Security and Medicare taxes. The current Social Security tax rate is 6.2%, while the Medicare tax rate is 1.45%. To calculate Fica taxes, simply multiply the employee's gross wages by the appropriate tax rate. For example, if an employee earned $1,000 in gross wages, their Fica taxes would be $62 ($1,000 x 0.062).

Unemployment Taxes

You will also need to pay unemployment taxes to state and federal government.

1. Federal Unemployment Tax (FUTA)

The FUTA tax rate is 6.0% on the first $7,000 of an employee's wages. However, most employers are eligible for a 5.4% credit, which reduces the effective tax rate to 0.6%. To calculate FUTA taxes, multiply the employee's wages by 0.006. For example, if an employee earned $5,000 in wages, their FUTA taxes would be $30 ($5,000 x 0.006).

2. State Unemployment Tax (SUTA)

Every state has its own unemployment tax system, with its own tax rates and wage limits. To calculate state unemployment taxes, you'll need to contact your state's unemployment office for more information. For example if the state tax rate is 2.7%, the SUTA would be $135 ($5000 x 2.7% = $135).

How To Make Payroll Tax Payments?

Once you know how to calculate employer payroll taxes, making payroll tax payments to the IRS won't be a hassle. There are a few simple steps you can follow to ensure that your payments are made on time and accurately.

First, you'll need to obtain a copy of IRS Form 941. This form is used to report your quarterly payroll taxes. You can get a copy of the form from the IRS website or by contacting your payroll department.

Next, you'll need to calculate the amount of taxes you owe. To do this, you'll need to gather information about your employees' wages and hours worked. Once you have this information, you can use the IRS withholding tables to calculate the amount of taxes owed.

Once you've calculated the amount of taxes owed, you'll need to make a payment to the IRS. Payments can be made electronically using the IRS E-Pay system or by mailing a check or money order to the IRS. Be sure to include your employer identification number (EIN) on all payments.

How Can Fincent Help In Calculating Payroll Taxes?

Payroll taxes are a tedious task that includes reading data, calculating and complying with laws. By automating these tasks, Fincent provides you with the following capabilities to calculate the payroll taxes.

1. Calculating Social Security And Medicare Taxes

As an employer, you are responsible for withholding payroll taxes from your employee's wages. Withholding these payroll taxes helps to fund Social Security and Medicare. However, calculating the correct amount to withhold can be tricky and Fincent can help. It helps employers calculate payroll taxes by calculating the correct amount of Social Security and Medicare taxes to withhold from your employees' wages.

2. Calculating Federal Unemployment Taxes

Fincent will take into account all of the relevant information and provide you with an accurate calculation of the tax owed. It will help you file your annual FUTA return and make any necessary payments. By using Fincent, you can ensure that you are in compliance with all federal payroll tax requirements.

3. Figuring State Unemployment Taxes

Figuring payroll taxes can be a daunting task for any business owner, but helps businesses calculate state unemployment taxes by considering the number of employees, the type of business, and the location of the business.

It then calculates the amount of tax that is owed and provides a payment schedule. This can be a valuable tool for businesses that have multiple locations or that are expanding their operations. With Fincent, businesses can be sure that they are paying the correct amount of tax and that their employees are properly covered.

4. Tracking Employee Withholding Allowances

Fincent works by tracking employee withholding allowances, so you can be confident that you are withholdings the correct amount of money from each paycheck. In addition, Fincent automatically updates withholding rates in accordance with changes in tax law, so you can rest assured that you are always up-to-date on the latest tax code. As a result, Fincent is an invaluable tool for anyone who wants to make sure they are withholdings the correct amount of money for their taxes.

5. Tracking Employee Taxable Wages

Fincent software is a new and innovative way to calculate payroll taxes by tracking employee taxable wages. The system works by recording employee data such as hours worked, wages paid, and tips received.

This information is then used to calculate the proper amount of taxes owed. The system can also be used to report tips received, which is important for reporting purposes. It is designed to be easy to use and understand, and it comes with a user-friendly interface.

6. Generating Forms 941, 944, And W-2

Fincent helps businesses save time and money by generating forms 941, 944, and W-2 in order to streamline the process of calculating payroll taxes. It offers a variety of features that make it an attractive option for businesses, including the ability to create and manage multiple tax forms, the ability to file electronically, and the ability to track payments.

7. Generating Form 1099

Form 1099 is one of the most important documents that you need to file, and it can be tricky to get everything right. Fincent helps you calculate payroll taxes by generating Form 1099 and take all of the guesswork out, so you can focus on running your business.

8. Importing And Exporting Data

Fincent lets you calculate payroll taxes by importing and exporting data so that you can quickly and easily get the information you need without having to wade through stacks of paperwork.

Importing data is as simple as uploading a CSV file, and exporting data can be done with just a few clicks. Plus, Fincent is always up-to-date with the latest tax laws, so you can rest assured that you're getting accurate information.

The Takeaway

As you can see, learning how to calculate payroll taxes could not be simpler. We hope this information was helpful and easy to follow. However, if you don't feel comfortable doing it on your own, Fincent can help. It makes payroll and tax-related tasks simple, and take the burden of dealing with them off of your hands. Try us for free today to effortlessly get your payroll taxes done. We'll help you make tax season a breeze!