How to Calculate Payroll Taxes

Understanding how to calculate payroll taxes is an important part of running a business. Payroll taxes are a type of employment tax that are required by federal law. Types of payroll taxes include self-employment taxes and Federal Insurance Contributions (FICA) taxes. Employers are required by law to withhold FICA taxes from their employee's gross wages.

Those who are self-employed are required to pay a self-employment tax. However, this can depend on the structure of your business. Any self-employed business owner that does not receive a regular salary is legally bound to pay self-employment taxes.

Other common types of employment taxes can include federal income taxes, federal unemployment taxes, local income taxes, state income taxes, and state unemployment taxes.

What You Will Need for Tax Calculation

When you are calculating taxes that need to be withheld, it is important that you have the right information, most of which can be found on your employee's most recent W-4 form that they have completed themselves.

In addition to the W-4 form, there are a few other pieces of information that you will need to make your calculations. This information includes:

  • Each employee's gross pay for the current pay period.
  • Tax withholding tables for income taxes for the current fiscal year, which can be found in IRS Publication 15-A.
  • The current FICA tax withholding percentages.
  • Social Security's maximum withholding amount for the current year.

After you've gathered this information, you should easily be able to calculate payroll taxes.

How to Calculate the Withholding Amount

The amount of taxes that will need to be withheld from an employee's paycheck will vary from employee to employee. Factors that can influence withheld taxes include:

  • Whether the payroll period is biweekly, weekly, semi-monthly, or monthly.
  • The relationship status of the employee.
  • How many tax exemptions the employee has claimed.
  • The employee's gross pay during the current pay period.
  • How many withholding allowances are being used.
  • Any other taxes that your employee has requested to be withheld.

How the Calculation Is Done: Step by Step

Calculating your company's payroll taxes requires following several steps. To get started, you will need the work sheet found in IRS Publication 15-A: Employer's Supplemental Tax Guide. The steps for payroll tax calculation are as follows:

  1. Locate the table that matches the payroll period used by your company.
  2. Find the correct column for your employee's marital status.
  3. In the single section, find the number of allowances.
  4. Find the gross wages section. Wage sections are labeled "over" one wage amount, "but not over" another wage amount. For instance, if your employee's biweekly wage is $600, this would be over $599 but not over $1691.
  5. Keep looking along the category line until you find the right number of withholding allowances. After you have found this section, you will need to perform two calculations.
  6. Take the amount in Column C and subtract it from gross wages. Next, take this amount and then multiply it by the percentage in Column D. The result of this calculation will be your withholding amount.
  7. If your employee has requested additional withholdings, you will add this to the withholding amount to find the grand total withholding.

State and Local Income Tax Withholding

As an employer, you are required to withhold both local and state income taxes from your employee's gross wages. If your business is located in a state with no income tax, such as Florida, you will not have to withhold these taxes.

Calculating the withholding amount for state income taxes follows the same process as federal income taxes.

How to Calculate Payroll Taxes: FICA Tax

When you calculate either self-employment taxes or FICA taxes, you will use a standard percentage. FICA differs from other withheld taxes because it is both an employer and an employee tax. This means that both you and your employee will contribute the same amount of FICA taxes.

Currently, 7.65 percent will be withheld from your employees' gross wages, and you will pay an additional 7.65 percent for each of your employees. The standard FICA percentage is divided between Social Security and Medicare taxes. The percentage you will be required to pay can change from year to year.

Social Security Tax Rate

The Social Security tax rate for 2017 is 6.2 percent. This percentage must be withheld from the wages of each of your employees. Employers should withhold and contribute this tax portion until an employee earns $127,200. Once an employee has reached $127,200 in gross wages, you should stop withholding and contributing this tax.

Medicare Tax Rate

Currently, the Medicare tax rate for employee wages is 1.45 percent. Like other types of payroll taxes, employers are required to match this 1.45 percent Medicare tax. However, there is no wage limit for Medicare taxes.

If a single employee earns more than $200,000, there will be an additional 0.9 percent Medicare tax. This same percentage should be applied to married employees filing jointly that make over $250,000 and married employees filing separately that earn more than $125,000. Additional Medicare taxes are paid solely by the employee.

How to Calculate Payroll Taxes: Self-Employment Tax

With self-employment taxes, there is no shared responsibility between employers and employees. A self-employed business owner is required to pay the complete amount of both Medicare and Social Security taxes.

Another name for self-employment taxes is the Self-Employment Contributions Act (SECA) tax. The 2017 tax rate for self-employment is 15.3 percent, with 12.4 percent being paid to Social Security and 2.9 percent going to Medicare. The 2.9 percent owed to Medicare taxes takes affect when you earn more than $127,200. An additional 0.9 percent Medicare tax will be levied if your gross wages rise above a certain amount based on your filing status.

Other Deductions That Reduce Gross Pay

Employers are allowed to provide their employees benefits that are funded by pretax payroll deductions, including:

  1. Retirement plan contributions. This can include a 401(k) plan.
  2. 403(b) plan contributions for nonprofit or government employees.
  3. Flexible spending account contributions, a voluntary program that provides reimbursement for medical expenses.
  4. Health savings account contributions, which are similar to flexible spending accounts. The difference is that the money in the account does not roll over between fiscal years.

If you need help with determining how to calculate payroll taxes, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.