woman using a calculator to determine payroll taxes

How to Calculate Payroll Taxes

This article was up to date as of 8/12/2019. For updated information on employment taxes, visit https://www.irs.gov/forms-pubs/about-publication-15.

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
  • Medicare 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:

  1. Locate the “Wage Bracket Percentage Method Tables” in IRS Publication 15-A and find the table that matches your pay period.
  2. Review your team member’s W-4 to determine if they’re filing as single or married.
  3. Find out how many allowances your employee is claiming.
  4. 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.
  5. Subtract the amount in Column C from your employee’s gross wages.
  6. Multiply the resulting amount by the percentage in Column D.
  7. 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.

Example

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.

example of a completed 2019 Form W-4

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.

wage bracket percentage method tables from IRS publication 15 for weekly pay periods

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 paycheck.

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 following calculations:

  1. Determine how much to withhold in Social Security by multiplying your employee’s gross wages by 6.2%.
  2. Multiply your employee’s gross wages by 1.45% to determine how much Medicare tax to withhold.

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.

Example

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 portion.

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.