Employers are responsible for many important tasks, one of the most being calculating payroll taxes. Determining how to calculate payroll taxes is a necessary financial task that businesses need to do. If you’re a small business owner and you’re struggling to figure out how to calculate payroll taxes, don’t panic.
Even though the tax code may seem complicated, as soon as you figure out the required tax filings and how to calculate the math, the process is straightforward.
What are payroll taxes?
Before determining how to calculate payroll taxes, it’s important to understand the basics about what they are. Generally speaking, payroll taxes are employment-related taxes that employers are required to pay to the state and federal governments when they pay employees. Governments use payroll taxes to fund different state and federal programs and these taxes include FICA, FUTA and SUTA, each with their own tax rates.
There are four main payroll taxes including Social Security, Medicare, federal unemployment and state unemployment. Social Security taxes fund the federal Social Security program and payments go toward those who are retired to help support their lives. Medicare taxes fund the Medicare program that offers healthcare at low or no cost to those who are retired. Federal unemployment taxes (FUTA) funds the federal unemployment program, paying those who have lost their jobs. State unemployment taxes are administered by states to financially support those who are unemployed.
FICA taxes, or Federal Insurance Contributions Act taxes, include Social Security taxes and Medicare taxes and are paid half by employers and half by employees. In most cases, employers withhold the employee’s portion from the employee’s paycheck and pay it toward the IRS.
Calculating payroll taxes
The IRS has withholding tables that employers can use to calculate payroll taxes by hand. Other options include using a spreadsheet template or a paycheck calculator, however, these options can be time consuming. These methods also come with the risk of making incorrect calculations.
The first step in determining how to make the right deductions from employee paychecks in calculating the total compensation amount that each employee earned during the pay period. If there are hourly workers, you’ll need to multiply the hours they worked by the pay rate. Be sure to factor in any tips, commissions or bonuses.
For salaried workers, you’ll need to divide an employee’s annual compensation by the total number of pay periods in one year. For example, if employees are paid weekly, divide the pay by 52. If employees are paid bi-weekly, divide by 26 instead.
To calculate federal income tax withholding, how much money you withhold is based on the employee’s income in addition to the information provided on the IRS Form W-4. Then, use IRS Publication 15-T that outlines the wage bracket method and the percentage method. Keep in mind that employees can opt to have additional tax withheld or request to be exempt from federal tax withholding.
In summary, payroll taxes are calculated by taking an employee’s gross pay and multiplying it by the tax rate. Once each type of tax is calculated, employers need to pay the employer portion and withhold the employee portion.
Work with Founder's CPA
Calculating payroll taxes is easier with the right team on your side. At Founder’s CPA, we offer modern accounting services for startups from seed to scale. With over 500 clients helped, we’re confident we can help you however you need it. Contact us today and take advantage of our free consultations.
