Things You'll Need:
- IRS Pub 15 Circular E
- W-4 forms
- State income tax forms and instructions
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Step 1
Collect the necessary documents. You need to have a W-4 from each employee. Get a copy of IRS Publication 15, Circular E for the current tax year. These can be downloaded from the IRS website in PDF format. In 41 of the 50 states in 2008 you must withhold state income tax as well. Go to your state Department of Revenue website for the necessary documents and instructions.
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Step 2
Compute the employee's gross pay. Include any overtime, commissions or bonuses. Do not include any nontaxable compensation such as business expenses or mileage reimbursements. If the employee is a tipped worker, include all tips the employee has declared, or the minimum amount the IRS requires, whichever is greater.
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Step 3
Look on the employee's W-4 form. You need two items from the form: the employee's filing status (single, etc.) and the number of withholding allowances the employee has claimed. If the W-4 isn't available, assume the employee is filing single with zero allowances. Next, look in IRS Publication 15 Circular E for the amount to allow for each withholding allowance. For example, if the employee is single and paid weekly, this amount in 2009 is $67.61. Multiply this amount by the number of allowances and subtract the result from the employee's gross pay. This is the taxable income.
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Step 4
Decide whether to use the wage-bracket method or percentage method to compute the income tax to be withheld (the IRS includes instructions for both methods). For the wage bracket method, look up the taxable income (from step 3) on the appropriate filing status table. Deduct the amount shown.
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Step 5
Go to the percentage method tables to use this method. This is the one normally used. Under the appropriate filing status, you will see a set of wage ranges with percentages for each. Use this to calculate the employee's tax. For example, if the employee is filing single and has taxable income of $400, the tax will be 10 percent of the amount from $51-198 ($14.70) plus 15 percent of the amount over $198 (30.30) for a total tax of $35.00 (figures from 2009 IRS Publication 15, Circular E)).
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Step 6
Calculate the Social Security withholding. This is 6.2 percent of the employee's gross pay (not the taxable income from step 3) up to a maximum of 102,000 (2008). The amount changes each year. For 2009 the maximum is $106,800. Once an employee has reached this total for the year, do not withhold any further Social Security.
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Step 7
Calculate the Medicare tax to be withheld. The amount is 1.45 percent of the gross pay (again, not the taxable income from step 3). There is no upper limit on Medicare contributions. Complete the calculation of the employee's paycheck taxes by following the instructions for figuring state income tax.
