As an employer, you’re required to withhold certain taxes
from your employees’ paychecks. You’re also required to remit these taxes to
the IRS and your state tax agency on their behalf. These payroll taxes include:
federal income tax
Social Security taxes
state and local payroll taxes
When you’re running payroll, it’s essential that you
withhold the correct amount of taxes to avoid steep penalties and protect your
employees from fines. If you would like to calculate payroll taxes yourself,
keep reading to learn how.
Step 1: Use your employee’s W-4 to determine federal income tax withholding
The IRS gives you two options for calculating federal income
tax withholdings: the percentage method and the wage bracket method. While
neither option is simple, it’s easier to calculate taxes using the wage bracket
method. To calculate federal income tax withholding, follow these steps:
Review your team member’s W-4 to determine if they’re filing as single or married.
Find out how many allowances your employee is claiming.
Use Columns A and B from the wage bracket to locate your employee’s wages. Their gross paycheck amount should be higher than the amount in Column A, but not more than the amount in Column B.
Subtract the amount in Column C from your employee’s gross wages.
Multiply the resulting amount by the percentage in Column D.
If your employee wants an additional amount of income tax to be withheld from each paycheck, add it to the number found in step 6. Then, withhold the final amount from their paycheck.
An employee makes $480 per paycheck every week. They’re
filing as single, claiming one allowance, and would like an additional $3.00
withheld from each paycheck.
To determine how much federal income tax to withhold from
each paycheck, find the wage bracket table for a weekly pay period. Using the
left side of the table (because the employee is filing single) locate the
appropriate rows in Columns A and B. Because the employee makes $480 per week,
they make over $340.80 but not more than $912.80.
Subtract $184.97 from $480, which equals $295.03. Then,
multiply $295.03 by 12%, which equals $35.40. Add the additional $3.00 the
employee would like to withhold, then withhold a total of $38.40 from their
Step 2: Calculate Social Security and Medicare taxes
Under the Federal Insurance Contributions Act (FICA), you’re
required to withhold Social Security and Medicare taxes from your employees’
paychecks. You’re also required to match their contributions, so you’ll each
pay a total of 7.65%. To determine how much to withhold for FICA, use the
how much to withhold in Social Security by multiplying your employee’s gross
wages by 6.2%.
your employee’s gross wages by 1.45% to determine how much Medicare tax to
If your employee makes over $132,900, Social Security taxes will work a little differently. If they make over $200,000, you will need to withhold extra Medicare tax on some of their income. Learn more about how much to withhold.
Using the same example as above, multiply the employee’s
gross wages of $480 by 6.2%, which equals $29.76. That’s how much Social
Security taxes to withhold. You’ll also pay that same amount as your employer’s
Then, multiply $480 by 1.45% and withhold $6.96 in Medicare
taxes. Don’t forget to pay that same amount as the employer.
Step 3: Determine state and local taxes
You’re also responsible for withholding and paying state and local payroll taxes. Every state, county, and city will have different rules about calculating payroll taxes, but you can contact your state’s tax agency to learn more.
Let payroll software do the work for you
Clearly, payroll taxes are complicated and can take a lot of
your time to calculate when you run payroll. If you deduct anything from your
employees’ paychecks, like health insurance premiums or retirement plan
contributions, then you also need to keep up with which deductions are taxable.
Thankfully, there’s an easier option: payroll software. Payroll software, like Workful, will calculate all your payroll taxes every time you run payroll. It will also keep track of your tax liability, so you’ll always know how much you need to deposit. When rate change, the software will update automatically. Instead of spending hours running payroll, you could be done in mere minutes.