Calculating Payroll Taxes 101 - [UPDATED]
For many employees, payday is up there with Christmas and birthdays — but even better since it comes around more than once a year. For employers, on the other hand, payday can be a never-ending and sometimes pretty stressful responsibility. While payroll services and software are readily available, employers may still have to devote a good chunk of time and grit to comply with both employment and tax laws to make sure payroll flows smoothly each pay period. Thankfully, there are some general guidelines to follow when it comes to basic payroll calculations.
Laying the Groundwork
An employee should complete a federal tax withholding form, also known as the Employee Withholding Allowance Certificate, or W-4 form. A state tax withholding form may also be required. Based on the form(s), the company can then calculate how much money to deduct toward taxes (more on that soon).
Before it's time to crunch numbers, it's necessary to determine each employee's gross pay (generally the number of hours worked in a pay period multiplied by the hourly rate). For instance, if an employee logged 40 hours at $20 an hour, his gross pay would be $800. If required, calculate overtime for non-exempt workers (at least one and a half times the regular rate of pay after 40 hours worked in a workweek). Exempt workers are not required to be paid overtime. Check out the Department of Labor's criteria on overtime.
Calculating the correct amount for the taxes can be tricky. While it would be simple if taxes were based on employees gross pay, payroll generally doesn't work like that.
Employers must withhold federal and state income taxes from each employee's paycheck. The amount withheld is based on the number of allowances that the employee claimed on the W-4 form which includes marital status and number of dependents (federal income tax tables break down the amount each employee owes based on this information). Each state's tax board provides a formula to calculate state taxes withheld (when applicable). Local income taxes may also need to be deducted depending on location.
Social Security and Medicare Taxes
Social security and Medicare are generally the easiest taxes to calculate. Since they're a fixed percentage of each person's earnings, employers just need to check the current rates — in 2017, the social security tax rate is 6.2 percent and Medicare is 1.45 percent. Employers must also contribute the same rates for both, though after an employee earns $127,200, social security ceases for both employees and employers. This amount is subject to change year to year. With Medicare, the percentage goes up to 2.35 percent if the employee earns $200k or more.
Some employees may have additional voluntary deductions — including disability, flexible-spending accounts, and retirement benefits. There may also be court-mandated deductions, like child support, or alimony.
Employer Only Taxes
Two payroll taxes, FUTA (federal unemployment tax act) and SUI (state unemployment insurance) are paid just by the employer in most states and not deducted from employees' paychecks. While FUTA rates are uniform for all employers (currently 6.0 percent) SUI rates vary based on employees' earnings as well as a few other company- and state-specific factors. Employers may receive a credit for SUI taxes depending on how frequently the company lays off employees. Payments to FUTA end for each employee whose wages exceed $7,000 for the year.
For more help getting started, we encourage you to check out our business calculators. While they shouldn't be used to calculate exact taxes or payroll, they're a great resource for estimates and general guidance.
This website contains articles posted for informational and educational value. SurePayroll is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, SurePayroll. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. If you require legal or accounting advice or need other professional assistance, you should always consult your licensed attorney, accountant or other tax professional to discuss your particular facts, circumstances and business needs.