Payroll taxes are an essential part of managing a business and ensuring that you comply with federal, state, and local tax laws. The payroll tax expense represents a significant financial responsibility for employers as they must withhold these taxes from employees’ salaries and pay them to the respective tax authorities. This article covers the process of calculating payroll tax expenses for your employees and keeping your business compliant.

Step 1: Understand Payroll Taxes

Payroll taxes are the various taxes that employers must withhold from employees’ wages and pay to the appropriate government authorities. These taxes fall into two categories: employee deductions and employer contributions.

1. Employee Deductions: As an employer, you will withhold Social Security, Medicare, federal income taxes, and any additional state or local income taxes from your employees’ paychecks.

2. Employer Contributions: You will also need to contribute matching amounts for Social Security and Medicare, as well as specific taxes like the federal unemployment tax (FUTA) and state unemployment taxes (SUTA).

It’s crucial to understand the different categories of payroll taxes so that you can navigate each component in calculating your payroll tax expenses accurately.

Step 2: Gather Employee Information

To accurately calculate payroll tax expenses, you will need each employee’s Form W-4 on file. This form contains their claimed allowances and filing status, which helps determine their federal income tax withholding rate. You’ll also need their wage or salary information, the number of hours they worked during the pay period, and any additional taxable benefits.

Step 3: Calculate Federal Income Tax Withholding

Withholding rates for federal income taxes vary depending on the employee’s filing status, allowances reported on their Form W-4, and IRS wage-bracket tables found in IRS Publication 15-T (https://www.irs.gov/pub/irs-pdf/p15t.pdf). Use this information combined with employees’ salaries or wages to determine the correct amount to withhold for each employee.

Step 4: Calculate Social Security and Medicare Taxes

For Social Security, withhold 6.2% of your employee’s wages, up to the maximum taxable amount of $142,800 (as of 2021). For Medicare, withhold 1.45% of an employee’s entire wage. There is no maximum taxable limit for Medicare taxes.

As an employer, you must match these withheld amounts for both Social Security and Medicare contributing an equal percentage of the employee’s wages.

Step 5: Calculate State and Local Income Taxes

State and local income taxes can vary significantly by location. Consult your state and local tax agencies to determine applicable income tax rates and withholding rules for your business.

Step 6: Determine Additional Employer Payroll Taxes

Apart from matching contributions for Social Security and Medicare, employers are also responsible for the Federal Unemployment Tax Act (FUTA) tax and State Unemployment Tax Act (SUTA) tax. FUTA tax is currently set at a rate of 6.0% on the first $7,000 paid to each employee during the tax year. Your business may be eligible for a credit against FUTA taxes if you pay your SUTA taxes promptly. The SUTA rate varies by state, so consult your state’s tax agency for more information.

Conclusion

Calculating payroll tax expenses can be a complex process due to the various federal, state, and local taxes involved. It’s essential to keep accurate records of your employees’ information and track their income throughout the year. By following these steps, you will be better equipped to manage your payroll tax responsibilities effectively and maintain compliance with legal regulations.