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Calculating Payroll Tax Expenses

Calculating Payroll Tax Expenses
payroll tax

Calculating Payroll Tax Deductions

Learning how to accurately calculate payroll tax deductions is important for both the employer and employee.

For the employer, these tabulations directly impact total wage expenses. The withholding calculation for the employee affects his or her take-home pay, personal tax liability, and taxable income.

The payroll tax consists of the income tax as well as the Social Security and Medicare tax. As an employer, you match the Social Security and Medicare tax paid by your employee. Employers are solely responsible for paying the federal unemployment tax and state unemployment insurance, which are based upon how much the employee makes.

Accurately Withholding Employee Taxes

To ensure that the payroll tax withholding for individual employees is correct, take the following steps:

1. Make sure that each employee accurately fills out a W-4 form, which includes a personal allowance worksheet.

2. After the employee has provided the employer with his or her filing status (married or single) and number of dependents, the employer will use that information to calculate the amount of taxes that will be withheld from the employee’s gross pay.

3. Next, 6.2 percent of the employee’s gross pay must be withheld for Social Security. Social Security must be paid until the employee has reached the wage base limit, which was $127,200 in 2016. Wages above that amount are not usually subject to the Social Security tax.

4. Go to the online IRS calculator at and input the employee’s filing status and how many dependents he or she is claiming. Employers will also have to enter the employee’s gross wages and how often they are paid. Then, refer to IRS Publication 15 to determine how much federal income tax to withhold.

5. In 2017, the Medicare withholding rate is 1.45 percent of the employee’s gross pay. It is important to note that unlike Social Security, there is no wage base limit for the Medicare tax. In addition, single employees who make over $200,000 annually have an additional 0.9 percent Medicare tax for every pay period after they have been paid $200,000 in wages. For married couples filing jointly, the threshold is $250,000.

Pre-Tax Deductions

Employers can also offer benefits on a pre-tax that reduce the gross pay of their employees and thus lower their tax liability. These include employee contributions to retirement plans and a flexible savings account for health needs as well as a health savings account.

Employers should always pay their state unemployment taxes first. Each state has different tax rules, so be sure to get the proper information from your state. It can be used as a credit for their federal unemployment tax if it has already been paid. The federal income tax that employers must pay is 6 percent on the first $7,000 of an employee’s wages.

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