6 Tips on How to Calculate Payroll Taxes

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How to Calculate Payroll Taxes

Paying employees is an important part of any company.

But between calculating gross wages and all the various withholdings, it can get a little complicated.

Luckily, there are ways to make the process a lot simpler, so keep reading!

1. Instruct all employees to complete a W-4 form so that you can properly calculate federal tax withholdings on wages.

This form is used to document the worker’s filing status.

You also use the W-4 form to calculate the number of allowances the employee wants.

Both the filing status and the allowances impact the amount of federal tax withheld from wages.

  • The worker’s filing status can be married, single or head of household. There are several other variable that can impact filing status. The taxpayer’s filing status impacts the dollar amount of wages withheld.
  • A W-4 form includes a personal allowance worksheet. The employee calculates their allowances, based on the number of dependents they have. If the worker is married, the employee also receives an allowance if their spouse is not working.
  • The more allowances claimed by an employee, the less federal tax is withheld from gross pay.

2. Gather all of the payroll information for each pay period.

As an employer, you may process payroll weekly, bi-monthly or once a month.

Regardless of how often you pay, you need to gather the necessary records to compute gross wages.

  • You need to maintain updated payroll records for each employee.
  • While some companies keep spreadsheet records, you can operate more efficiently by using payroll software.
  • Your records should indicate each employee’s current salary. For hourly workers, you need to document the hourly rate of pay, including overtime pay. Payroll software can calculate which employee hours should be counted as overtime.
  • Hourly workers should post their time using a formal timecard. You need a specific process in place to track the exact number of hours worked each day. Employers should be required to immediately post their time each day, so that your records are always current.

 How to Calculate Payroll Taxes

3. Calculate gross wages for each worker.

When you reach the end of a pay period, compute the gross wages owed for all of your employees.

The calculations will vary, depending on whether the worker is salaried or is paid on an hourly basis.

  • Use software to compute the gross wages owed to salaries workers each pay period. Say, for example, that an employee’s annual salary is $52,000 a year. You process payroll 26 times a year (every 2 weeks). Each payroll period, the worker earns ($52,000 divided by 26), or $2,000 in gross wages.
  • Assume that a worker earns a $25 per hour rate of pay for regular hours, and a $37.50 rate for overtime hours (overtime rate in the US is 1.5x the normal rate) . Overtime is most often paid for all hours worked over 40 hours in a calendar week.
  • For the most recent pay period, the employee worked 45 hours in week one and 40 hours in week two. You need to calculate both regular hours and overtime hours. The regular hour pay is (80 hours multiplied by $25 = $2,000). Overtime pay earned totals (5 hours X $37.50 = $187.50). The gross wages for this employee add up to $2,187.50.

4. Determine the proper withholding amount for federal income tax.

The primary method that most taxpayers use to pay their tax liability is through paycheck withholdings.

Your employer submits the wages withheld to the IRS on your behalf.

To find out more about many payroll tax issues, use this link: Calculate Payroll Taxes.

  • Assume that you owe $10,000 in federal taxes on your $50,000 annual gross wages.
  • Say that your employer has withheld $9,000 of that $10,000 liability. On a bi-monthly payment schedule this would appear as $375 withheld by your employer per pay period (a total of $9000 / year) with an actual federal tax liability of $416.67 per pay period (a total of $10,000 / year).
  • All wage earners receive a W-2 form from their employer.
  • This form documents your gross wages and your withholdings, including federal and state tax withholdings.
  • When you file your tax return, you include a copy of your W-2. That W-2 will state that $9,000 in tax was withheld from pay. The worker files the tax return and pays the remaining $1,000 in federal taxes due.
  • As an employer, you can use IRS Publication 15 (Circular E) to compute withholdings.
  • Choose either the Percentage Method or the Wage Bracket Method and use the appropriate chart in the publication.

 How to Calculate Payroll Taxes

5. Deduct other required amounts from gross pay.

Employers are also required to deduct amounts for social security, Medicare, and federal unemployment taxes.

Keep in mind that the employer must calculate each tax withholding for each individual worker.

The business reports the information and submits payment to each taxing authority.

  • Social Security provides an income to retired people and those who are disabled.
  • The tax rate is 6.2% for 2015. Once an employee has reached a gross cumulative pay of $118,500, no additional Social Security tax is withheld.
  • Medicare provides medical coverage for the elderly and people who are disabled.
  • The 2015 tax rate is currently 1.45%. All wages are subject to this tax.
  • Employers pay into both a state unemployment tax and a federal unemployment tax system.
  • Both systems provide income to people who are out of work.
  • You should pay the required state tax first.
  • The federal tax calculation allows you to receive a credit for taxes you’re paid into your state system.

6. Compute other deductions and submit payments to taxing authorities.

Processing payroll can be difficult, because you have to report and submit withholdings to several different entities. Because of this complexity, you should strongly consider investing in payroll software.

  • Many businesses hire a payroll company to handle payroll issues.
  • You may find that hiring an outside expert can help you save and time money.
  • A payroll company can make the withholding calculations and submit the net payment amounts to each worker’s bank account. You supply the employee data and the company bank account you use to process payments.

     How to Calculate Payroll Taxes

  • You may need to deduct additional employee items such as retirement plan contributions, health insurance premiums and charitable contributions.
  • Keep in mind that some payments are deducted before taxes are calculated.
  • Other amounts are deducted after taxes have been computed.
  • All deductions should appear on the employee’s pay stub individually, and are typically listed with values for both the current pay periods deduction and the cumulative year to date” deductions for a given line item.
  • Pre-tax versus post-tax deductions are usually noted as such and often appear in separate sections.

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