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How to Calculate Payroll Taxes in 3 Easy Steps

Posted by Dana Spinello, CPA on Jan 23, 2018 9:00:00 AM
Dana Spinello, CPA

how to calculate payroll taxes
Have you ever wondered how to calculate payroll taxes? It’s certainly not an easy process and if you’re not careful, you could make some potentially expensive mistakes. Payroll tax calculations affect both the employer and the employee. For employers, the tax calculation affects the total wage expense incurred. For employees, the worker’s taxable income, personal tax liability and take-home pay are affected. Here are three steps to help you better understand how to calculate payroll taxes.

How to Calculate Payroll Taxes

  • Calculate Federal Income Tax Withholding
  • Add up Deductions and Tax Withholding
  • Figure Out State and Federal Unemployment Taxes

Steps to Calculate Payroll Taxes

  1. Calculating Federal Income Tax Withholding

The first step in how to calculate payroll taxes begins with having workers complete a W-4 form to declare their personal allowances. Use these allowances to calculate the amount of tax to withhold from an employee’s gross pay by applying the following IRS rules.

  • Determine the employee’s gross wages.
  • Locate the employee’s filing status.
  • Locate the employee’s number of allowances.
  • Enter the requested information into the IRS withholding calculator.
  1. Adding Up Deductions and Tax Withholding

Two standard payroll deductions are Social Security and Medicare taxes. Social Security provides retirement and disability income. Medicare provides medical coverage to the elderly and disabled.

  • Social Security withholding is 6.2% of the employee’s gross pay.
  • Earnings above the wage base of $127,200 are generally not subject to social security tax.
  • Medicare withholding is 1.45% of the employee’s gross pay (no wage limit).
  • Single employees making over $200,000 ($250,000 for married couples filing jointly) per year have an additional Medicare tax (0.9%) for every pay period after $200,000 in wages have been paid.

Beyond the required federal withholdings, there are dozens of other deductions that reduce employee pay. Employee benefits are often funded through payroll deductions on a pre-tax basis. Examples include:

  • 401(k) or 403 (b) plans
  • FSA (health flexible spending arrangement)
  • HSA (health savings account)
  1. Figuring Out State and Federal Unemployment Taxes

The final step in how to calculate payroll taxes relates to unemployment taxes. The employer pays for federal and state unemployment taxes. Each state has different tax rules, so you’ll need to find the proper tax information for your employees. If you have employees in multiple states, each will have to follow the tax laws in their state.

  • The 2017 federal unemployment tax is 6% of the first $7,000 you pay in wages to an employee.
  • If you’ve paid the state unemployment taxes, you can take a credit of up to 5.4% on the federal calculation.

Once you’ve figured out the unemployment taxes, you’ll need to report and pay your tax withholdings. Each type of payroll tax uses a different form and is paid through a different system.

When you partner with FrankCrum PEO, you don’t have to worry about staying on top of this process. We calculate payroll taxes for you and update our software as the tax codes change. We eliminate your risk by collecting and paying taxes, while ensuring state and federal tax compliance. Call 800-277-1620 ext. 4 to learn more about our payroll and tax solutions.

5 Steps for Payroll Processing

Topics: Payroll

Dana Spinello, CPA

Written by Dana Spinello, CPA

Dana is the Senior Tax Manager at FrankCrum. Dana has been with FrankCrum since 2010 and oversees tax compliance, payroll tax administration and employment benefit tax planning. She has been a Certified Public Accountant since 2002. When she’s not working, Dana enjoys traveling and reading historical novels.

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5 Steps for Payroll Processing