Do you understand the concept of payroll taxes and how to accurately calculate them? Payroll tax can often seem like a complicated topic to try and wrap your head around, but understanding it is important for any business when calculating their employees' salaries.

In this blog post, we'll discuss what payroll taxes are, what they're used for, and how you can easily calculate them - so if you need clarification about where to start with Dealing with payroll taxes, read on!

What Is Payroll Tax

Payroll tax is a levy the government imposes on all income individuals and businesses earn. It is collected from employees through deductions from their gross wages or salaries and employers in the form of contributions to employee benefits programs.

Payroll taxes fund programs, including Social Security, Medicare, unemployment insurance, disability insurance, worker's compensation benefits, and pensions. Withholding taxes from employee wages for these programs is the responsibility of employers, as they are responsible for remitting the funds to various government agencies.

Employer-paid payroll taxes can include federal and state unemployment insurance and half of the FICA (Federal Insurance Contributions Act) tax, which pays for Social Security and Medicare benefits. Employers must pay a percentage of each employee's wages for these quarterly taxes.

Calculating Payroll Tax Explained

Calculating payroll tax can seem daunting, but any business needs to stay compliant. Employers and employees must understand federal, state, and local taxes applied through payroll deductions.

At a federal level, employers are responsible for withholding income tax from their employee's wages and paying a portion of the FICA (Federal Insurance Contributions Act) tax, which pays for Social Security and Medicare benefits. Employers must also pay Federal Unemployment Tax (FUTA), which is used to fund state employment agencies.

At a state level, employers are responsible for withholding income tax from their employee's wages in states requiring it and paying State Unemployment Tax (SUTA). Some states also require employers to contribute to state disability insurance programs.

Once you've determined the applicable payroll taxes, you can then calculate the amounts that need to be paid by both employers and employees. To do this, you'll need to consult a few different sources: the employee's W-2 form, which reports their wages and taxes withheld; the IRS's Publication 15-A (which guides determining whether a worker is an employee or an independent contractor); and your state's tax laws.

When calculating payroll taxes, employers must also consider pretax deductions such as those for medical benefits, employer-sponsored 401(k) plans, and contributions to an employee's flexible spending account. Employers must also keep records of their payroll taxes for at least four years, as the IRS can audit them.

The responsibility of calculating payroll taxes and filing the appropriate forms falls on employers, so businesses need to stay up-to-date on changing laws and regulations regarding payroll taxes. Properly calculating payroll taxes is the only way to ensure compliance and avoid penalties from the government.

How to Calculate Payroll Tax

When calculating payroll taxes, employers must know the tax rates and requirements associated with each tax type and how to accurately calculate them. Payroll taxes are used for various government initiatives such as Social Security and Medicare, so these taxes must be calculated correctly for businesses to remain compliant with the law.

The first step businesses should take when calculating payroll taxes is determining the percentage of an employee's wages that must be withheld for income taxes. The wage bracket and the more complicated percentage methods are the main methods used to calculate federal income tax withholding.

Wage Bracket Method

For salaries up to $100,000, withholdings are calculated using the pay bracket technique. It is determined by a worker's pay period and marital status. Businesses must collect data from the employee's Form W-4, Employee's Withholding Certificate, and gross salary in order to use this method.

The exact calculation steps depend on whether the employee's W-4 was issued before or after 2020. If the W-4 was issued in 2020 or later, there are four main steps to calculate payroll taxes:

• Adjust the employee's wage amount - Based on the employee's total taxable compensation for the payroll period and the number of payroll periods the company has each year, the adjusted wage amount is determined.
• Figure the tentative withholding amount - The salary bracket method table in Publication 15-T is calculated using the employee's marital status and the employer's payroll period.
• Account for tax credits - The employee may be eligible for tax credits listed on their W-4, such as the child tax credit or the earned income tax credit, which lessen how much tax is owed for the current pay period.
• Figure the final amount to withhold - In this phase, any taxes that must be added are determined by the employee's W-4 choices to withhold additional taxes, such as those for pension or annuity payments.

If the W-4 was issued in 2019 or earlier, the two main steps to calculate payroll taxes are:

• Figure the tentative withholding amount - The marital status of the employee and the frequency of the employer's payments are used to find which wage bracket method table to apply. The employee's total taxable income plus any withholding benefits are then used to compute it.
• Figure the final dues to withhold - In this phase, any taxes that must be added depending on the employee's choice to have additional taxes withheld on their W-4 are done so.

Percentage Method

The percentage technique is used when an employee's annual income is more than the cap established by the wage bracket method tables. This method requires more calculations than the wages bracket an approach does, hence it is more frequently used by employers who use automated payroll systems or third-party payroll service providers.

The methods for calculating payroll taxes using the percentage technique depend on whether a W-4 was issued before to or following the year 2000, just like the wage bracket method does. Although there are some smaller processes in both scenarios, the primary steps are largely the same. (Once more, IRS Publication 15-T outlines the precise information for each stage.)

The exact calculation steps depend on whether the employee's W-4 was issued before or after 2020. The percentage method calculates withholdings for employees earning more than $100,000 in wages and salaries.

It uses a formula that considers an employee's taxable wages, marital status, and number of allowances. Many other factors must be considered when using the percentage method to calculate payroll taxes, so employers should consult IRS Publication 15-T for more detailed instructions.

FAQs

How do I calculate payroll tax in Excel?

Calculating payroll taxes in Excel is a simple process. You must enter the employee's W-2 information into the spreadsheet, including their wages and applicable tax withholdings. Then you can use formulas to calculate the payroll taxes due for that employee. To make things even easier, many free payroll calculators are available online, specifically designed for Excel.

What is the most common payroll tax?

The most common payroll taxes are Social Security and Medicare taxes, both withheld from employees' paychecks and paid by employers. These taxes are calculated as a percentage of each employee's wages up to a certain annual limit.

What other taxes are employers required to pay?

In addition to Social Security and Medicare taxes, employers are responsible for paying the Federal Unemployment Tax (FUTA) and state unemployment insurance (SUI).

Conclusion

Payroll taxes are an important part of any business. Employers must calculate payroll taxes correctly and pay the appropriate forms or face penalties from the government. Payroll taxes are calculated by either the wage bracket or the percentage method, depending on an employee's total taxable wages and other information from their W-4 form. By understanding payroll taxes and how to accurately calculate them, businesses can remain compliant with the law.