Payroll Tax: What Is It? How Can You Calculate It ?

You’re not alone if you’re a small company owner attempting to figure out how to calculate payroll. In the United States, almost six million small companies are in the same boat as you. They all have fires to put out, workers to pay, futures to prepare, and little to no time to deal with the Internal Revenue Service’s tax law. The good news is that, though the payroll tax law may appear difficult at first, it is very simple if you understand what tax files are necessary and how to perform the arithmetic. As a result, accurately computing payroll taxes is essential not just for your employees, but also for your accountant and Uncle Sam.

Payroll tax becomes your responsibility the day you recruit your first employee. Despite its name, the payroll tax is not a single tax, but rather a catch-all phrase for all taxes levied on employee earnings.

What Exactly are Payroll Taxes?

payroll tax

What is Payroll Tax? When you think about payroll taxes, you might consider all of the taxes you deduct from your employees’ paychecks. Payroll taxes, on the other hand, are only one form of employment tax. FICA (Federal Insurance Contribution Act) and self-employment taxes are examples of payroll taxes. 

The majority of businesses are required to compute and withhold payroll taxes from their employees’ gross taxable earnings.

Payroll Tax Breakdown

payroll tax cut

The Payroll taxes are classified into two types: those paid out of your own pocket and those collected from employee paychecks and sent to the government.

Payroll Taxes Deducted From Your Paycheck:

  • The FICA tax pays for social security and Medicare. The employer part for social security is 6.2 percent and 1.45 percent for Medicare, and you will collect and return the same amount from your employees.
  • The FUTA tax pays for unemployment insurance. The overall percentage is 6.0 percent. However, most states offer a 5.4 percent credit, which means that most businesses pay just 0.6 percent.

Payroll Taxes That You Have Only Collected and Remitted:

  • Income Taxes in the United States
  • Taxation at the state and local levels

Meaning of the Terms “Gross Taxable Wages” and “Net Taxable Wages”?

The money your employee makes that is subject to income tax withholding and/or FICA tax is referred to as gross taxable earnings.

For example, an employee’s gross pay is $1,000, but he or she receives a $200 cost reimbursement and a $100 health insurance deduction. Subtract the health insurance deduction from the gross wages ($1,000 – $100 = $900) to arrive at the gross taxable wages. Do not include the refund for expenses. The taxable gross wages are $900. This is said to be the amount we use to calculate the FICA tax.

Calculating Federal Income Tax (Wage Bracket Method)

payroll tax calculator

  1. Find the tables labeled “Wage Bracket Percentage Method Tables” in IRS Publication 15-A. Use the table that corresponds to the pay period of your employee.
  2. Check form W-4 to see if the employee is married or single and how many allowances they claim on their tax return.
  3. In columns A and B, find the employee’s gross wage for the pay period. The pay should be greater than the amount in column A but less than the amount in column B.
  4. Subtract the amount in Column C from the total.
  5. You now have to Multiply the answer by the percentage in Column D.
  6. Check the employee’s W-4 form to see if he or she wants more tax deducted from each paycheck. If they do, subtract that amount from the total.
  7. The amount you should deduct from the employee’s paycheck for that pay period is the ultimate result.

Calculate FICA (Federal Insurance Contributions Act)

It is a required payroll tax calculator deduction that is used to fund programs such as Social Security (disability insurance, old age, and survivors) and Medicare (covering health insurance for folks over 65).

When it comes to paying FICA, your employee contributes 50% of their income, while you, the employer, contribute 50% of your own earnings. As the employer, you must withhold and pay the amount your employee is accountable for from her salary, as well as remit that money on their behalf.

Tax Rates

The current social security tax rate is 6.2 percent for the employer and 6.2 percent for the employee, for a total of 12.4 percent. The current Medicare rate is 1.45 percent for the employer and 1.45 percent for the employee, for a total of 2.9 percent.The FICA tax rate is 15.3 percent of the employee’s salary when combined.

FICA (Federal Insurance Contributions Act) Payroll Tax Calculation

Withholdings of Social Security

Multiply your employee’s gross salary for the current pay period by the current Social Security tax rate to determine Social Security withholding (6.2 percent ).This is the amount you’ll take from an employee’s salary and remit with your payroll taxes.

Withholdings of Medicare

Multiply your employee’s gross salary by the current Medicare tax rate to determine Medicare withholding (1.45 percent ).

Matchings by Employer

You are accountable as an employer for matching what your employees pay in FICA taxes. In this scenario, you’d also have to pay $310 in Social Security and $72.50 in Medicare taxes.

FUTA Calculation 

The acronym FUTA stands for Federal Unemployment Tax Act. It is a payroll tax paid by employers that funds state unemployment services.

On the first $7,000 in earnings paid to employees in a calendar year, the FUTA tax rate is 6%. However, because each state receives a credit to offset the remaining 5.4 percent of FUTA payments, the real amount that employers pay is 0.6 percent.

Difference Between FICA & FUTA

FUTA (Federal Unemployment Tax Act) is an employer-paid payroll tax cut that finances state workforce agency and unemployment insurance, whereas FICA is a payroll tax deferral that pays to Social Security and Medicare. At the conclusion of the fiscal year, you will submit FUTA on Form 940 – Employer’s Annual Federal Unemployment Tax Return.

Also ReadTop Benefits of Virtual Bookkeeping Services

Making Tax-Related Payments to the IRS

Simply because you’ve computed payroll and paid your employees doesn’t mean your job is over. You must also submit the taxes withheld (FIT, FICA, state, and local income taxes) to the appropriate taxing authorities. The IRS is in charge of FIT and FICA. You can see that this your state’s withholding tax agency for state and local income taxes. Make sure to include both the taxes you withheld from your employee’s paycheck and the taxes you are accountable for as the employer. 

When you transmit federal taxes depends on how much you pay your employees, how regularly you pay them, and how long your lookback period is (historical analysis of your payroll and past payments)

The final day of the month after the conclusion of a calendar quarter is the deadline for filing Form 941. For example, Form 941 is due on April 30th for the quarter ending March 31st. There are severe penalties for failing to file this paperwork, so don’t forget!

For state tax filings, contact your state’s withholding tax office to determine the filing requirements for state and local income tax rates. Each state is unique.

Which States Do Not Collect Income Taxes?

The states listed below do not have a state income tax:

  • Alaska
  • Florida
  • Nevada
  • The state of New Hampshire
  • Tennessee
  • The state of South Dakota
  • Texas
  • The capital of the United States Washington, D.C.
  • Wyoming
  • Tennessee and New Hampshire solely tax dividends and interest income.

Payroll Tax When a Third Party Handles the Payroll

When you outsource the salary, the payroll provider calculates and transfers all these taxes for the company. This means it will eliminate the cost of calculating the payroll tax burden.

Last But Not Least!

Good luck with the payroll taxes (and the team development)! If you ever have any questions or feel like you’d prefer to delegate this task to someone else, we make payroll very simple. We offer both virtual bookkeeping and payroll services. 

Other than that, if you liked this post then go ahead and drop a comment down below to let us know. Also, don’t forget to read other informative blog posts generated by us. 

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