How to Calculate Payroll Liabilities
When an employer pays an employee, the gross wage of the employee is reduced by withholdings for federal and state tax. The employee deductions may also include deductions for health insurance, retirement contributions, local taxes garnishments or child support payments. The employee withholding become payroll liabilities for the employer. After paying the employees, the employer must also remit the withheld payments to the appropriate payees.
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Things You'll Need
- Spreadsheet or payroll software
- IRS payroll tax tables
- Employee W4
- Employer benefit plan
Instructions
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To calculate the federal withholding tax, use the IRS tax tables (See Resources) and the employee's W4. The tables list the payroll period for weekly, bi-weekly, semimonthly, monthly and annual, and are broken down by Single and Married. Find the employee's gross wage by period. Using the number of exemptions on the W4, read across the chart to find the correct federal withholding amount.
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To calculate the FICA tax, the combined Social Security and Medicare tax, multiply the payroll period gross wage by 7.65%.
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To calculate the state withholding tax, use the state links (See Resources) provided by the IRS to access the payroll tax tables for your state. For example, when accessing the link for Missouri, the calculation for state tax is : "MISSOURI WITHHOLDING TAX PER PAYROLL PERIOD --- Divide the employee's annual Missouri withholding amount by: 260 if you pay daily, 52 if you pay weekly, 26 if you pay bi-weekly, 24 if you pay semi-monthly, 12 if you pay monthly. The result is the employee's Missouri withholding tax per pay."
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Municipalities throughout the U.S. have local taxes that apply both to the employee and the employer. Check your city's website for these rules and withholding calculations. For example, the City of St Louis has a payroll tax in place of .05% for employees living and/or earning wages in the City of St. Louis. In addition, the employee is taxed an additional 1% on these earnings.
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Employers who offer employees health insurance and withhold the employee's portion of the contribution may offer these pre-tax. Subtract the health insurance withheld contribution from the gross wage before calculating the federal, FICA and some state tax.
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When the employer offers a retirement plan that includes an employer match, both the employee contribution and the employer match are liabilities. The employee contribution is deducted from the gross wage before calculating the federal tax and some state tax. Do not reduce the FICA wage for the retirement contribution.
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Employee deductions for union dues, alimony, garnishments and child support are not deducted before tax. The court order for alimony, garnishment and child support will contain the percentage of the employee's net pay available for payroll deduction.
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The employee's taxable wage is used for FUTA tax (Federal Unemployment Tax), and for SUTA (State Unemployment Tax). Taxable wage is the gross wage less any pretax deductions. The FUTA tax of .008 is calculated on the first $7,000 of the employee's taxable wage. The SUTA tax percent and taxable wage limit vary by state. (See Resources).
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Tips & Warnings
The Social Security portion of FICA is limited by wage. The wage changes each year. Read the IRS Circular E for the new wage amount, and additional payroll changes for the new year.
