How to Calculate Employee Taxes

As an employer, you should understand how to calculate employee taxes so that the right amount of federal, state, Social Security and Medicare taxes are withheld from the gross earnings. Calculating appropriate taxes from gross earnings is relatively easy when you have the right tax tables and a correct W-4 Form from the employee. It is very important that your calculations are not estimated, but done according to the government guidelines. If the employee has pre-tax deductions, skip to Section 2. If the employee has no pre-tax deductions, use Section 1.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Publication 15-T
• State withholding tables
• W-4 for every employee

No Pre-tax Deductions

1. Calculate the federal tax liability for the gross earnings of an employee with no pre tax deductions by using the W-4 Form on file and Publication 15-T (see Resources). Look up the gross pay in the appropriate table to find the amount of tax to subtract. The tax tables are for single and married wage earners, with a table for different pay times (weekly, bi-weekly, monthly or annually) and the amount of allowances claimed on the W-4 Form.

2. Calculate the state tax for an employee with no pre-tax deductions using the state withhold table from your given state. See the Resources for a link to the website where you will find every state and what the percentage of tax liability would be. Each state has a different percentage used to figure the tax liability on employee's gross earnings.

3. Withhold Social Security from the employee's gross earning. Pre-tax deductions do not affect Social Security tax liability. The amount of Social Security to subtract is 6.2 percent (.062). For instance, gross earnings x .062 = Social Security to withhold.

4. Withhold Medicare from the gross earnings. Pre-tax deductions do not affect Medicare tax liability. The amount of Medicare to subtract is 1.45 percent (.0145). The formula is gross earnings x .0145 = Medicare to withhold.

Employee's with Pre-tax Deductions

5. Calculate federal tax liability for an employee that has a pre-tax deduction, such as a 401K. Take the gross income and subtract the amount of the pre-tax deduction. Then look up the remaining amount in the federal tax table. Find the filing status, pay schedule and the number of allowances, and then look under the gross pay after the pre tax deduction. For example, gross pay -- pre tax deduction = net gross pay, which is the amount you use to find the federal tax withholding.

6. Calculate the state tax liability. Subtract the pre-tax deduction from the gross pay. This will be the amount that you calculate the state tax with from the state withholding table for you state. See the resource box for a link to the website to find your state percentage. For example, gross pay -- pre-tax deduction = net gross pay, which is what you use to calculate the state tax withholding.

7. Withhold Social Security from the employee's gross earning. Pre-tax deductions do not affect Social Security tax liability. The amount of Social Security to subtract is 6.2 percent (.062). For instance, gross earnings x .062 = Social Security to withhold.

8. Withhold Medicare from the gross earnings. Pre tax deductions do not affect Medicare tax liability. The amount of Medicare to subtract is 1.45 percent (.0145). The formula is gross earnings x .0145 = Medicare to withhold.

Tips & Warnings

• Remember that pre-tax deductions do not affect Social Security and Medicare liabilities. When using Publication 15-T, make sure to find the appropriate table for the filing status of the employee and the pay period time schedule as well as the amount of allowances claimed. If you have to deduct union dues, insurance or garnishments, these are not pre tax deductions and are subtracted after the federal, state, Social Security and Medicare withholdings.
• Keep all tax deductions in a bank account until transfer to the state and federal governments.

Resources

• State Information for Withholding Tax
• Publication 15-T