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If you think paying your employees is confusing, just wait until you have to calculate payroll taxes. While you can find plenty of payroll services eager to take this task off your hands, even if you do turn payroll over to payroll software or a service provider , you should still know how to calculate payroll taxes.
If you have an employee — even just one — you need to pay payroll tax. Payroll tax is divided into two types: those that you are solely responsible for, and others that you collect from your employees to remit to the correct government entity. In this guide, we explain what payroll taxes are, what forms you need in order to calculate taxes properly, and finally, a step-by-step guide to calculating payroll taxes for your employees. The form has been redesigned for , with withholding calculated differently.
Any W-4 forms completed prior to can use the old calculation. On his W-4, Aaron claimed married status with one allowance. Both you and your employee contribute 7. You next calculate any state taxes Aaron may be responsible for. Since Aaron lives and works in New Mexico, he must pay state tax. If you were reimbursing Aaron for expenses, you would add it back to his gross pay.
In fact, not much has changed until you get into the withholding math. Some states like Florida have no state income taxes, so you may be off the hook.
Different states apply payroll taxes in different ways, but once you know how to calculate the FIT and FICA taxes, calculating state taxes is a similar exercise. Also, be sure to check whether your state imposes local taxes that are paid on top of federal and state taxes. There are voluntary pre and post-tax deductions like health insurance premiums, k plans, or health savings account contributions. Be careful here, because pre-tax deductions like k are taken out of gross income in Step 1, which means that the tax withholding calculation in Step 2 will be lower.
Post-tax deductions are taken out after Step 2. Pre-tax deductions will save the employee more taxes. If your employee paid for any company expenses out of their own pocket, they expect to be reimbursed. Employers can either pay reimbursements separately from payroll or combine it with payroll. Remember that expense reimbursements are not part of gross wages, and thus not subject to tax withholding. Any expenses you reimburse to employees should be made in full and added on to net pay at the end of your calculation.
When these items are added and subtracted, the rest of the basic math outlined above stays the same. You also need to send the taxes you withheld i. The timing of when you send the federal taxes depends on how much you pay employees, how frequently you pay them, and your lookback period historical analysis of your payroll and past payments.
The deadline to file Form is the last day of the month following the end of a calendar quarter. For example, for the quarter ending on March 31st, Form is due on April 30th. Each state is different. Good luck calculating those payroll taxes and building your team!
Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A payroll tax is a percentage withheld from an employee's pay by an employer who pays it to the government on the employee's behalf.
The tax is based on wages , salaries, and tips paid to employees. Federal payroll taxes are deducted directly from the employee's earnings and paid to the Internal Revenue Service IRS. The term federal payroll taxes refers to the taxes deducted to fund Medicare and Social Security programs in the United States. Federal income tax, which also is withheld from employee paychecks, goes into the general fund of the U. Most states and some cities and counties impose income taxes as well, and these amounts are paid directly to their coffers.
In addition, employers, but not employees, also pay federal unemployment taxes for each of their employees. Unlike the U. In addition to income taxes, payroll taxes are collected by federal authorities, and some state governments in many countries, including the U. These payroll tax deductions are itemized on an employee's pay stub. The itemized list notes how much is withheld for federal, state, and municipal income taxes, as well as the amounts collected for Medicare and Social Security payments.
Governments use revenues from payroll taxes to fund specific programs, including Social Security, health care, and workers' compensation. Local governments may collect a relatively small payroll tax to maintain and improve local infrastructure and services, including first responders, road maintenance, and parks. Employers bear the primary responsibility for funding unemployment insurance.
If they lay off employees, those employees are entitled to unemployment benefits. The rate of unemployment insurance the employer will pay varies by industry, state, and federal fees.
Some states require employees to contribute to unemployment and disability insurance. As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities. Your next step is to determine the method you want to use to calculate withholding.
Most employers have two options, the wage bracket method and the percentage method. While not exactly simple, the wage bracket method is the more straightforward way to calculate payroll tax.
Check form W-4 to determine whether the employee files income tax as married or single and the number of allowances they claim. The wage should be over the amount found in column A but under the amount found in column B. Check form W-4 to determine if the employee requests additional tax withheld from each paycheck. If they do, add that amount to the final number.
As the employer, you are required to withhold and pay the amount your employee is responsible for from her paycheck, and remit those funds on their behalf. The current tax rate for social security is 6. The current rate for Medicare is 1. If so, the rules are a little different. Read more at the IRS website. You can learn all you need to know about social security in our CPA reviewed blog post.
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