As tax season arrives, one major question that remains among employers is – ‘How to calculate payroll taxes?’ If you’re having a similar question, we’re here to get you sorted.
Here is a brief guide on payroll tax basics & a stepwise guide on payroll tax expense calculations. Have a look!
What are Payroll Taxes?
Payroll taxes are nothing but the percentage that is withheld from an employee’s pay by an employer who will then pay those taxes to the government on their behalf. These taxes are usually based on
wages, tips & salaries paid to employees.
Federal Payroll taxes are deducted from the employee’s pay & paid to the IRS directly. In the USA, Social Security & Medicare are funded from the payroll taxes.
How to calculate payroll tax expense? [Stepwise Guide]
Here is an easy-to-understand step-by-step guide on how to calculate payroll taxes. You can say that calculating payroll taxes means achieving net pay from gross pay.
Step #1: Calculate your Gross Pay
How do you define gross pay? It’s the amount earned by the employee before any deductions are made from his earnings or tax amounts are withheld.
The employee’s gross pay depends on whether the employee is working on hourly or weekly wages. It also includes overtime hours worked by the employee.
Salaried employees are mostly exempted from the overtime rules & gross pay remains the same for each pay period until any increment notice arrives. You should only consider their pay period here. For
instance, how many paychecks are generated within a month for salaried employees?
Wages also include commissions, bonuses, tips, etc earned by the employee in the same pay period.
Step #2: Figure out Employee Tax Withholdings
You have the employee’s gross pay here. Additionally, you’ll need the number of allowances from their W-4 form. Finally, you can calculate how much amount is to be withheld for covering their taxes. Most
US states require withholding both federal & state taxes and FICA taxes per paycheck.
When you’re creating a paystub online, the paystub generator will calculate the accurate % of tax deductions based on the state you’ve selected. So, you don’t need to worry about it.
Step #3: Be precise about deductions
Besides deducting taxes, other amounts are to be deducted as applicable. Some pre & post-tax deductions include health insurance premiums, 401 (k) plans, health account contributions, etc. In some
cases, involuntary deductions like child support, wage garnishments, etc may be involved too.
Step #4: Sum up expense reimbursements, if any
If any company expenses are paid by the employee, he will likely expect reimbursement. It’s the employer’s choice whether they want to pay reimbursements separately from the payroll or add it along with the paycheck.
While you’re planning to pay reimbursements, don’t forget that they’re not a part of gross wages. So, you cannot count them in for tax withholdings. All reimbursements should be paid in full & can be added to the net pay amount if they’re being paid in the payroll.
Step #5: Calculate the Total
Once your gross pay, deductions, tax withholdings, and reimbursements are clarified, the last step is to calculate the paycheck.
Here is how you do it:
✔️ Take the gross pay amount
✔️ Deduct employee tax withholdings
✔️ Add expense reimbursements, if any
✔️ Here’s your Net Pay!
The final amount to be sent to your employee on the payday is with you.
How to Calculate Employer Payroll Taxes?
Besides withholding taxes from the employee’s pay, the employer is responsible for paying some taxes.
This includes:
✔️ FICA – 6.2% Tax amount goes for Social Security & 1.45% for Medicare
✔️ Unemployment Taxes (Federal is 6% & State unemployment taxes varies according to the state)
Who pays state unemployment taxes?
As mentioned above, the state unemployment taxes will be paid by the employer & not the employee. It generally includes 6% of the first $7000 of the wages paid to the employee.
Making payments to the IRS
Your job doesn’t end at creating payroll & making payments to the employees accordingly. The withheld tax amounts from each paycheck are to be tracked & reported to the tax authority. FIT & FICA are to be reported to the IRS. You’ll have to report to the state’s withholding tax agency in case of state & local income taxes.
Make sure you’re sending both the taxes withheld from the employee’s paycheck & the ones you’re responsible for.
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