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How To Calculate Payroll Taxes

Learn how to withhold, remit, and calculate payroll taxes! If you are a small business owner with employees, you know paying them is not as simple as just writing out a check.

For most employees, you must withhold the following taxes:

  1. Federal income taxes (based upon information provided in a W-4. Use the withholding charts from IRS Publication 15, also known as Circular E to calculate payroll taxes.
  2. Social Security withholding is 6.2% of gross wages.
  3. Medicare withholding is 1.45% of gross wages.

Your business must also match the FICA tax withheld from your employees’ paycheck:

The amount of the matching is:

  • Social security 6.2%
  • Medicare 1.45%

Total matching 7.65%

You report and pay these payroll taxes on IRS form 941.

Your payroll tax liability determines how often you have to report and pay your payroll taxes on the IRS form 941 to the IRS.

If your payroll tax liability is less than $2,500 for the entire quarter, your tax liability is considered small by the IRS and you simply prepare the IRS Form 941 on or before the due date the IRS has set up.

Your tax liability is considered large if for the previous two years, the average payroll tax liability is more than $50,000 per year. If your payroll liability is this high, my recommendation for you is to hire an experienced CPA.

If your tax liability is more than $2,500 per quarter and less than $50,000 per year, you fall into the medium category.

You must remit your payroll tax liability to the IRS on a monthly basis. For more information, read the Form 941 Instructions booklet.

Besides the taxes you report and pay on the IRS form 941, there are additional taxes you need to consider:

  • State incomes taxes — where applicable (based upon information provided in a W-4. Use the withholding charts from your state’s Income Tax Withholding form to calculate payroll taxes. Also find out which form you have to report and pay your employees’ state income taxes with.
  • FUTA — Your small business will probably need to report and pay Federal unemployment (FUTA) tax separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. You will need to file this payroll tax on the IRS Form 940.
  • SUTA — Check with your state’s tax and revenue department for details regarding the State Unemployment (SUTA) Tax as the taxable wage base varies from state to state.
  • Additional State and Local Taxes — Check with your local and state’s tax and revenue department to check for additional withholding. Example: There are a few states such as California that require you withhold and/or pay taxes that fund the state’s temporary disability insurance program.