How to Deduct Taxes From Employee Income
If you have employees, you need to pay wages and withhold federal, state, Social Security and Medicare from their gross income. Every employer is responsible for keeping accurate records pertaining to payroll and sending the taxes withheld to the federal and state governments quarterly. Learn how to deduct taxes from employee income so that you do everything according to state and federal government requirements.
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Instructions
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Calculate the gross income for an employee. Look at the W-4 form that was filed by the employee to determine the total allowances if any. Some people will claim zero, while some will claim one or more. You need this form to calculate federal and state taxes. Social Security and Medicare are straightforward and deducted for everyone.
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Calculate the Social Security tax by taking the gross wage multiplied by 12.4 percent (.124). The Social Security tax is split between the employer and the employee. The employer pays 6.2 percent and so does the employee. For example, if the employee has gross earnings of $600, the employer will use this formula: 600 x .124 = 74.40. The amount subtracted from the employee's gross pay is half of $74.40, which is $37.20 and the employer pays the other $37.20. The employer is responsible to pay $74.40 when he or she files the quarterly 941 Form.
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Calculate the Medicare tax, which is 2.9 percent (.029) of the gross earnings. For example, the gross wage is $600, so you would use this formula: 600 x .029 = 17.40. The amount subtracted from the employee's gross earnings is $8.70 and the employer pays the other half, which is $8.70. The employer is responsible to pay $17.40 when filing the quarterly 941 Form.
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Calculate the federal tax by using the IRS Publication 15-T (see Resources section). The employer must look at the W-4 that was filed by the employee to find out the filing status (single or married). Then you must look at how many allowances the employee is claiming. Look at Publication 15-T (see Resources) to determine the amount of federal tax to withhold. There are tax tables for single and married as well as how often the employee is paid. Find the correct tax to withhold by finding the federal tax in one of the appropriate tables. The amount of federal tax withheld is also sent in with the 941 Form.
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Calculate the state tax by using the state withholding tax table for your given state. See the Resources section to find your state and the tax percentage to withhold from the employees gross earnings. The money withheld is sent to the state with a quarterly voucher that is sent to you by the state.
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Know that calculating the net income will follow this formula: Gross earnings - Social Security - Medicare - federal - state = net income. This formula is used if there are no pre tax deductions or any other deductions to the employee's earnings.
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Tips & Warnings
If you have pre tax deductions, you will use a different formula for calculating federal and state tax, but Social Security and Medicare are not affected by pre tax deductions.
Always keep all employee and employer tax contributions in a bank account until you pay them to the appropriate government agency.
