How to Compute Payroll Taxes
Employees working in the United States are subject to withholding for federal income tax (FIT), federal social security and Medicare taxes and state income taxes (SIT). Employers must match the employee social security and Medicare withholding and also pay federal unemployment (FUTA) and state unemployment taxes (SUI).
Compute FIT by using the withholding tables in IRS Publication 15-T. The IRS updates these tables whenever tax rates change.
The social security tax rate is 6.2% of wages up to the annual limit. Medicare tax is 1.45%, with no annual limit. Per the Social Security Administration (SSA), the limit on wages subject to social security tax "generally increases each year with increases in the national average wage index." The 2010 limit is the same as the 2009 limit, representing the first time since the automatic adjustment provision was enacted that it did not increase. The current limit is published in IRS Publication 15.
Pay FUTA only on the first $7,000 of wages paid to an employee each year. The full FUTA tax rate is 6.2%. You can take a credit of up to 5.4% for amounts you pay in SUI tax. The effective FUTA tax rate after the credit is .8%.
The laws for SIT and SUI vary by state. This article will explain how to compute federal employee and employer payroll tax withholding.
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Instructions
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Employee Taxes
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1
Locate the Wage Bracket Method withholding table in IRS publication 15-T for the employee's W-4 martial status and your payroll period frequency.
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2
Look up the employee's taxable gross wages in the first two columns of the table.
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3
Read across the table to the column for the employee's number of W-4 withholding allowances to find the amount to withhold for FIT.
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4
Multiply the employee's taxable gross wages by 6.2%.
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5
Withhold the result as social security tax.
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6
Multiply the employee's taxable gross wages by 1.45%.
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7
Withhold the result as Medicare tax.
Employer Taxes
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8
Multiply the employee's gross wages by .8%.
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9
Pay the result as employer FUTA.
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10
Pay an amount equal to the employee social security and Medicare taxes for employer social security and Medicare tax.
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1
Tips & Warnings
If you don't have a complete, valid W-4 for the employee, withhold as single with zero allowances.
Be sure you use the current version of Publications 15 and 15-T.
Do not withhold too much social security tax.
