How To Calculate Payroll Taxes
Starting out a new business is never easy, and one of the more difficult things new business owners should be able to learn is how to calculate payroll taxes accurately and efficiently. The world financial crisis has left so many in an economic turmoil that in all cash flow that comes along the way, every cent would count. Accurately calculating payroll taxes is quite important not only to the employee who’s expecting the most out of a paycheck but also to the employer and the government as well. The Internal Revenue Service is no-nonsense when it comes to computing taxes, and any miscalculation-albeit small or big-can land any business at odds with the authorities.
You will need the following:
- W4 form printed from the Internal Revenue Services (IRS) website
- IRS Tax Publication #15 Employer’s Tax Guide
- Trusty calculator
- Have the employee fill out the W4 form. This will provide the employer and the government the necessary information in calculating the proper withholding taxes for an employee. The form is already a pre-cursor and a poor man’s version of a payroll tax calculator. Based on the information the employee will put down on the form, the employer can now determine in which tax bracket the employee will be identified with, and this can be determined using Publication #15.
- Using Publication #15, determine the federal withholding tax. For a sample single employee earning $500 in a pay period, the Publication states that his withholding income tax amounts to $18.20 plus 15% of the excess over $434. In this case, 15% of the $66 in excess of $434 is $9.90. Thus, the total withholding tax for the said employee is $18.20 plus $9.90 which would amount to $28.10. This is but the start of the important lessons you need to gain on how to calculate payroll taxes.
- Calculate the Social Security taxes. Withheld social security taxes are calculated straight up. A predetermined percentage of 6.2% from every paycheck is the standard for the entire year provided that total social security withholding taxes will not exceed a total of $6,622.00. In the above mentioned employee’s case, 6.2% of $500 amounts to a $31.00 deduction from the gross paycheck. Keep in mind that as an employer, you will need to match up the exact amount withheld from the employee as part of the contributions. This is one of more important facets of calculating payroll taxes.
- Calculate the Medicare taxes. These are taxes imposed simply to provide basic health insurance for individuals 65 years and older. Medicare taxes amount to 1.45% of an employee’s payroll and as the social security taxes, the employer is required to match the same exact amount. The Medicare tax of 1.45% of the $500 gross paycheck is equivalent to $7.25.
- The state withholding tax. All states impose a state withholding tax save for nine states that do not. These are intricate sets of tax brackets and rates that will apply to each state that imposes such a tax. For the sake of sampling, a state tax for the above employee at $5.00 will be adopted.
- Calculate everything deductible from the paycheck. With the samples calculated above, from the original $500.00 gross paycheck of the employee, a total amount of $71.35($28.10 + $31.00 + $7.25 + $5.00) will be deducted arriving to the employee’s net paycheck of $428.65.
There are already a lot of payroll computation programs that thrive on the internet nowadays. What is important for employers is that they learn the basics in computing tax even if they choose to purchase these programs. In learning how to calculate payroll taxes, documentation is also a veritable must for every business organization as this will provide a paper trail for all the transactions that are being done for something as important as an employee payroll. There may be highly detailed computer programs that can do this for an employer, but nothing beats gaining basic stock knowledge to better understand the process of calculating payroll taxes.