What is Payroll Tax?

Payroll tax includes both the tax that your employer withholds from your paycheck and in turn pays to the government on your behalf, along with the payroll taxes paid by your employer.

In the United States, Social Security and Medicare (together referred to as FICA) and Federal Income Taxes (or Federal Withholding) are deducted from your paycheck, along with state-specific payroll taxes. Employees should receive an itemized list of these deductions on their paystub showing how much was withheld for FICA as well as federal, state and municipal taxes. The employer is also responsible to pay their portion of FICA, federal unemployment, state unemployment, and other state-specific employment taxes.

Self-employed individuals are required to pay self-employment taxes, which equals the total of the employee portion and the employer portion of FICA. This totals 12.4% Social Security up to $132,900 for 2019 + 2.9% Medicare +.09% if self-employment income exceeds the thresholds.

How to calculate payroll taxes?

There are a few factors that go into calculating payroll tax and it can vary by business or state. That’s why it is critical to make sure you are doing it correctly, so your company is in good standing. If your unsure if you are calculating payroll taxes correctly, feel free to reach out to us for outsourced accounting services.

Here are some simple steps to follow to calculate payroll taxes:

  1. Determine gross pay

This includes hourly wages or salary plus commission, overtime, tips and other taxable compensation. Deductions for retirement or savings plans and reimbursements for business expenses should not be calculated in the total gross pay.

  1. Reference employee W-4’s for determining the federal withholding amount

Review the employee’s W-4 to determine their filing status and withholding allowances. If you are running payroll manually, refer to the IRS Circular E for withholding tables that will assist in determining the proper withholding amount. There are also many free paycheck calculators found online to assist with this calculation.

  1. Compute employee deductions for Social Security and Medicare

Social Security is a flat rate of 6.2% up to $132,900 and Medicare is a flat rate of 1.45% + .09% if the salary threshold amount is exceeded ($200k if single, $250k if married filing jointly).  To calculate Social Security for payroll taxes, multiply the employee’s gross pay by these respective percentages, paying close attention to the annual thresholds.

  1. Calculate federal (FUTA) and state (SUTA) unemployment taxes

These taxes are paid by the employer. SUTA taxes are calculated based on the state rates while FUTA taxes are 6.2 percent of the first $7,000 of an employee’s wages, which is typically reduced to .8 percent after the state unemployment tax credit of 5.4 percent, depending on the state.

Depending on the size of your payroll, taxes can be due to the government monthly, quarterly, or within three business days of your payroll. Since penalties and interest are steep, it is important to know your deadline.

While it is important for business owners to know the correct steps to take when calculating payroll taxes, it can be difficult to comply with the rules and regulations governing payroll taxes.  If you own your own business, it may be in your best interest to outsource payroll and other important accounting functions for your business to a professional that knows how to ensure that it is handled properly. Check out the services we offer to determine if we can be of help! We can tailor our bookkeeping payroll services to meet your needs.

Steps to Calculate Your Payroll Taxes Recap

  • Determine gross pay
  • Reference employee W-4’s for determining the federal withholding amount
  • Compute employee deductions for Social Security and Medicare
  • Calculate federal (FUTA) and state (SUTA) unemployment taxes

If you have questions, we offer a free 20-minute consultation to help you assess your business needs. Call us today at 801-984-3805.


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