If you’re a small business owner struggling to figure out how to calculate payroll, you’re not alone. Over six million small businesses in the U.S. are in the same situation as you. They all have fires to put out, employees to pay, futures to plan, and little to no time to cope with the IRS tax code.
The good news is that even though the tax code may look complex, once you figure out what tax filings are needed and learn how to do the math, the procedure is fairly simple. With that being said, calculating payroll taxes accurately is crucial not only to your employees but also to your accountant. That’s why we chose to write this in-depth guide on how to calculate payroll taxes, step by step.
Table of Contents
- 1 What Are Payroll Taxes?
- 2 How To Calculate Payroll Taxes?
- 3 How To Make Payroll Tax Payments
- 4 Payroll Tax Withholding Calculator
- 5 Salary Paycheck Calculator
- 6 Employer Tax Calculator
What Are Payroll Taxes?
When a person works for a company full-time, both the worker and the employer are exposed to a variety of taxes. These taxes are known as “Payroll Taxes”. The employer withholds these amounts from the worker’s paychecks and submits them along with the company’s contributions, to the government. The application of these taxes, and their withholding, are needed by law.
Payroll taxes can comprise the following:
- Federal income taxes (paid by the employee)
- State and local income taxes (not all states charge income tax.Social Security and Medicare taxes (these are known as FICA taxes, which stand for “Federal Insurance Contributions Act.” This tax is split 50/50 between employee and employer)
- Federal Unemployment Tax Act (or “FUTA” is paid by the employer)
- State Unemployment Tax Act (or “SUTA”. Paid by the employer in most states)
- State Disability Insurance (paid by the employer, employee, or both)
- Workers’ Compensation (this is a state tax, paid by the employer)
What Is the Percentage of Federal Taxes Taken out of a Paycheck?
There is no common federal income tax percentage that is applicable to everyone. This is because all employees are needed to fill out a W-4 form (“Employee’s Withholding Allowance Certificate”) when employed at a company. The information an employee gives on this form, such as marital status, or number of children and dependents, along with the employee’s gross salary, will decide the amount of federal income taxes taken off of an employee’s check. There are seven distinct income tax brackets.
The other federal taxes do have standard amounts, they are as follows:
FICA tax is an employee and employer payroll tax, implying you and your employee both pay matching portions. Withhold a total of 7.65% from employee wages and pay a matching 7.65% for each employee.
The percentages are broken down by Social Security and Medicare tax. These rates are subject to change each year.
Social Security tax rate
The Social Security tax rate is 6.2% of each employee’s wages.
The 2020 Social Security wage base is $137,700 ($132,900 in 2019). Continue withholding and contributing the Social Security tax portion until the employee earns $137,700 in 2020. After the employee earns $137,700 in gross wages, stop withholding, and contributing to Social Security.
Medicare tax rate
The current Medicare tax rate is 1.45% of each employee’s wages. You must also contribute a matching 1.45%.
Unlike the Social Security tax, there is no wage base limit for Medicare taxable wages. There is an additional Medicare tax of 0.9% after an employee earns above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). Only employees pay the additional Medicare tax.
Employers and employees do not share the obligation of self-employment tax. Instead, you are responsible for paying the total amount of Social Security and Medicare taxes. Self-employment tax is also known as the Self-Employment Contributions Act (SECA) tax.
The self-employment tax rate is 15.3%. Of this percentage, 12.4% goes to Social Security and 2.9% goes to Medicare tax. After you earn $132,900 in 2019 ($128,400 in 2018), you only pay 2.9% of your wages (for Medicare). And, you will be required to pay the additional Medicare tax rate of 0.9% once you earn above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).
Are Payroll Taxes Tax Deductible?
Some payroll taxes are deductible to a business paying them on behalf of their employees, but they are not deductible by the employees themselves. A business cannot deduct federal income taxes (because the employee paid them) but can apply for tax deductions for Social Security, Medicare, and FUTA taxes.
If you have employees, you are going to be accountable for both:
- Subtracting a portion of employee wages to incur some taxes on their behalf
- Paying payroll taxes on each of your employees out of your own revenue
How To Calculate Payroll Taxes?
To run payroll, you are required to do seven things:
- Get your business established to run payroll.
- Calculate how much each employee earned.
- Calculate taxes you’ll be required to withhold and additional taxes you’ll owe.
- Pay your employees by subtracting taxes (and any other deductions) from employees’ earned income.
- Remit taxes to state and federal authorities.
- File quarterly and year-end payroll tax forms.
- Provide your employees and contractors W-2 and 1099 forms so they can work out their taxes.
The steps to calculate payroll tax are pretty simple, but there are a lot of them. Here’s how
it functions, and what tax rates you’ll need to apply.
- Find out each employee’s gross wages. Gross wages are the total amount of money your employee earned during the current pay period. The math works in a different way slightly for salaried employees, hourly employees, and contractors.
- Hourly employees: You’ll need to multiply the number of hours your employee worked by their hourly pay rate. If they worked any overtime hours, make sure to determine those hours at the overtime rate.
- Salaried employees: A salaried employee is only paid a portion of their annual salary each paycheck, so divide that employee’s annual salary by the number of pay periods you’ll have each year.
- Contractors: Advance to “Go” and collect $200! You don’t have to withhold any payroll taxes for contractors. Just pay them all that is on their invoice, but keep in mind that you’ll need to send out each contractor a 1099 form at the end of the year. Keeping good payroll records will make that procedure a lot simpler.
- Deduct any pre-tax withholdings. Payroll taxes aren’t the only thing to exclude from employees’ paychecks. Make sure to subtract for things like health and retirement benefits. The method for documenting and remitting these funds will vary depending on your benefits providers. Note that many services can be combined with payroll software, which permits you to automate your deductions.
- Deduct and match any FICA taxes: FICA, the Federal Insurance Contributions Act, is one of the many payroll acronyms you’ll quickly get to understand and love. It simply refers to the Medicare and Social Security taxes employees and employers have to pay:
- Social Security tax: Withhold 6.2% of each employee’s taxable wages until they earn gross pay of $137,700 in a given calendar year. The highest an employee will pay in 2020 is $8,537.40. As the employer, you must also match your employees’ contributions.
- Medicare tax: Under FICA, you also need to withhold 1.45% of each employee’s taxable wages for Medicare. Employers must match this tax as well. There’s no withholding limit like the one for Social Security, but well-compensated employees who earn more than $200,000 must pay an Additional Medicare Tax of 0.9%. You don’t have to match the 0.9%, but you should incorporate it in your withholding calculations.
- Pay FUTA unemployment taxes: Employers are exclusively responsible for paying federal unemployment taxes. The tax rate is 6% of the first $7,000 of taxable income an employee earns annually. If your company is needed to pay into a state unemployment fund, you may be qualified for a tax credit.
- Deduct federal income taxes, which can range from 0% to 37%. Withholding information can be found through the IRS Publication 15-T.
- Subtract any post-tax deductions: Some employees may be accountable for court-ordered wage garnishments or child support. They may also decide to make post-tax contributions to savings accounts, elective benefits (like life insurance), or other withholdings.
Example Of How To Calculate Payroll Taxes
Take a look at the following examples to better understand how to calculate employer payroll taxes (FICA and SECA taxes).
FICA tax example 1
You are a sole owner with three employees, Employee A, B, and C. Employees get paid on a biweekly basis. Below is the amount of each employee’s gross wages.
To calculate each employee’s FICA tax liability, you need to multiply their gross wages by 7.65%, as seen below. These are the amounts you withhold from employee wages and send to the IRS.
|Employee||FICA Tax Liability|
|Employee A||$1,500 X .0765 = $114.75|
|Employee B||$1,200 X .0765 = $91.80|
|Employee C||$2,000 X .0765 = $153.00|
Now, onto calculating payroll taxes for employers. You will be required to match each employee’s FICA tax liability.
|Employer FICA Tax Liability Total||$114.75 + $91.80 + $153.00 = $359.55|
You owe $359.55 per pay period to cover all the employer portions of FICA tax. Continue paying this amount until employee wages change. These employees will not earn above the Social Security wage base limit.
FICA tax example 2
Now let’s see an example of a highly compensated employee, Employee D. This person is your only employee. Employee D earns $10,000 biweekly.
Take a look at how much you need to withhold and send to the IRS for Employee D’s FICA tax.
|Employee D||$10,000 X .0765 = $765.00|
Now, let’s take a look at your FICA tax liability. Since you only have one employee, you will owe the same amount as Employee D.
|Employer FICA Tax Liability Total||$765.00|
Continue paying this amount until the employee’s wages change, they earn above the Social Security wage base or reach the additional Medicare tax threshold.
Take a look at how FICA will work once the employee earns above $200,000. You will no longer be required to withhold or contribute Social Security tax. Add the regular Medicare tax rate (1.45%) to the additional Medicare tax rate (0.9%). You will need to withhold a total of 2.35% for Medicare.
This is how much you will need to withhold from Employee D’s wages for FICA.
|Employee D||$10,000 X .0235 = $235.00|
You will withhold $235 from the employee’s wages. You will contribute 1.45% of the employee’s wages, as seen below.
|Employer FICA Tax Liability Total||$10,000 X .0145 = $145.00|
As you can see, you will withhold $235 from Employee D’s gross wages and contribute $145 for the employer portion.
SECA tax example 1
For self-employment tax, we will use a simple example. You earned $198,000 for the year. You will only apply the Social Security tax (12.4%) up to $137,700.
Let’s calculate your Social Security tax liability on your first $137,700. Social Security is 12.4% of your wages up to the wage base.
|Employer SECA Tax Liability (Social Security)||$137,700 X .124 = $17,074.80|
Now, let’s calculate your Medicare tax liability on all your wages. Medicare is 2.9% of your wages.
|Employer SECA Tax Liability (Medicare)||$198,000 X .029 = $5,742.00|
Since you do not earn above $200,000, you do not have to fret about the additional Medicare tax.
Your total SECA tax liability for 2019 would be $22,816.80 ($17,074.80 + $5,742.00).
Total payroll taxes for employers
Using FICA tax example 1 and SECA tax example 1, let’s calculate the total amount of payroll taxes for the year. There are 26 biweekly pay periods in a year.
|Employer FICA Tax Liability||$359.55 X 26 = $9,348.30|
|Employer SECA Tax Liability||$22,816.80|
|Total Tax Liability for Employer||$9,348.30 + $22,816.80 = $32,165.10|
You would owe $32,165.10 for the employer portion of FICA and your SECA tax obligations.
How To Make Payroll Tax Payments
Calculating your payroll taxes is the tough part. In reality, making payments is easy.
You just register in the Electronic Federal Tax Payment System (EFTPS), then make your payment online. It’s the only route to make a payroll tax payment (mailing checks isn’t
State And Local Payroll Tax
Employers are also accountable for paying state and local (city, county, etc.) employer payroll tax on behalf of employees. As with federal payroll tax, a portion of this tax is employer-paid and part is employee paid. Remember that “employee paid” just means that you, the employer, withhold a specific amount from your employee’s paycheck and then remit it as part of your payroll taxes.
In addition to state payroll tax (State Unemployment Tax, or SUTA), employers are also liable for remitting state income tax on behalf of their employees. State and local payroll taxes are regulated at the state and local level, and every state’s payroll tax rules are distinct. The Federation of Tax Administrators issued a list of each state’s taxing authority. You can explore more about payroll tax in your state and local area there.
Payroll Tax Withholding Calculator
The IRS urges everyone to use the Tax Withholding Calculator to carry out a “paycheck checkup.” This will assist you to make sure you have the right amount of tax withheld from your paycheck.
There are numerous reasons to check your withholding:
- Checking your withholding can better protect against having too little tax withheld and encountering an unexpected tax bill or penalty at tax time next year.
- At the same time, you may wish to have less tax withheld upfront, so you get more in your paychecks and get a smaller refund at tax time.
Salary Paycheck Calculator
Need to figure out your employees’ wages after taxes? There are numerous salary paycheck calculators available online that do all the gross-to-net calculations to estimate take-home pay.
Employer Tax Calculator
If it’s time to pay your employees, you’re in the correct place! Free Employer tax calculator online makes it easy to manage withholdings and deductions in any state. Employers can make use of it to calculate net pay, figure out how much to withhold, and know how much to incorporate in employees’ paychecks.