How to Calculate Payroll Taxes

Payroll taxes are made up of Federal and State tax amounts, Social Security amounts and Medicare taxes. Calculating payroll taxes for employees is an important and necessary part of operating a business. If you are an employer or and employee who wants to know how your withholding amount is determined, use this information on how to calculate payroll taxes.

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Steps

    1
    Determine employee's gross pay from employment agreement or time sheet. This figure would include tips, commission and overtime, if applicable. Tax exempt deductions such as retirement or savings plans are deducted prior to calculating income tax, but other withholding taxes are according to gross.
    2
    Check employee's W-4 form for filing status and withholding allowances. For example, married and 3 allowances. If the form is not available, you should assume as single and 0 allowances. If employees have questions, refer them to the worksheet on the back of the form.
    3
    Determine withholding amount for Federal Income Tax. Go to the IRS Publication 15 (Circular E). Choose either the Percentage Method or the Wage Bracket Method and use the appropriate chart.
    4
    Calculate employee contributions for Social Security Taxes. Effective in 2011, the Social Security tax rate is 4.2%. Once an employee has reached a gross cumulative pay of $106,800, no additional Social Security tax is withheld.
    5
    Calculate employee contributions for Medicare Tax. This rate is currently 1.45%. All covered wages are subject to this tax. There is no salary limit at which employees become exempt from contributing.
    6
    Determine employer contributions for Social Security and Medicare. Effective in 2011, the employer portion for Social Security is 6.2% and 1.45% for Medicare Taxes.
    7
    Calculate state and local tax percentages based on your state and local Department of Revenue laws. If your employees reside in different states, you will need to determine each individually according to their state. Many states that border each other have established taxing agreements.

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Tips

    Consider using a payroll calculator or online system. Many easy-to-use versions are available free for Excel. You might also try a small business accounting software.
    Consider computer-based timekeeping program. Many are simple to use, inexpensive and great time-savers. They also provide greater accuracy.
    Obtain a basic understanding of Federal and State payroll laws. Publications are available through the IRS and state Department of Revenue sites.
    Maintain accurate and up-to-date records for all employees. Check and double-check everything.
    Become familiar with reporting requirements and file on time. Publications can be obtained through the IRS and your local state Department of Revenue

 Warnings

    Do not rely on last year's information. Payroll Tax laws are constantly changing and evolving, as are employee circumstances. Consult the Federal and Local tax sites for the most up to date information.
    Never use payroll tax money for other company expenditures. Keep them in a separate account until reporting.