When millions of Americans get their weekly paychecks, part of what they’ve earned has been taken out for taxes. That’s because federal and state regulations require employers to calculate weekly taxes and withhold them from an employee’s pay. It’s not difficult to calculate weekly taxes since the rules are straightforward. It can be complicated simply because there are several different tax amounts to be figured. If you need to calculate weekly taxes, make sure every employee has completed a W-4 form before you start, to make things easier.
Things You'll Need
- W-4 forms
- IRS Publication 15, Circular E
- State/local tax instructions
Find the number of withholding allowances on the W-4 form and multiply by the amount for one allowance for the current year (listed in IRS Publication 15, Circular E: Employer’s Tax Guidelines). For example, in 2009 the weekly allowance was $70.19. If two allowances were claimed, this works out to $140.38. Subtract the total allowance amount from the employee’s gross wages. Also, subtract any tax-exempt items such as contributions to a 401(k) plan. The result is the earnings subject to federal income tax withholding.
Calculate federal income tax withholding. The IRS uses a tax bracket system with progressively higher percentages withheld in each bracket. Look in IRS Publication 15 for the appropriate tax table based on the employee’s marital status as stated on the W-4 form. Multiply the amount of money in each tax bracket by the given percentage until all the employee’s taxable earnings are accounted for. For example, if the employee is single and the taxable income is $300, then you deduct nothing for the first $51 (2009 tables) and 10 percent of the amount from $51 to $200 ($14.90). Then deduct 15 percent of the amount over $200 (15 percent of $100, or $15). Total the amounts to find the tax to be withheld. In this example, $14.90 plus $15 = $29.90.
Compute Social Security and Medicare taxes. For Social Security taxes, simply multiply gross wages by 6.2 percent. For Medicare the tax is 1.45 percent of gross wages. With Social Security there is an annual cap. If the employee’s year-to-date earnings exceed the cap, stop withholding Social Security tax. There is no cap for the Medicare tax. Employers must contribute an amount equal to what the employee pays for both Social Security and Medicare.
Determine state and local income taxes, if any. The procedure to calculate these taxes varies, so you will need to follow the instructions for your location. You can obtain instruction booklets from your state or local department of taxation or revenue.
Calculate the unemployment taxes employers must pay. The state unemployment tax (SUTA) should be figured first because it may be used as a credit to reduce the federal unemployment tax (FUTA). Follow the instructions from your state department of revenue or labor to figure SUTA tax. For FUTA the tax is 6.2 percent of an employee’s gross wages up to $7,000 per year. The SUTA tax paid can be taken as a credit against FUTA, up to 5.4 percent of gross wages, thereby reducing FUTA to as low as 0.8 percent of gross wages.