How to Calculate Payroll Expenses

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Employers are required to withhold certain deductions from employee paychecks.
Employers are required to withhold certain deductions from employee paychecks. (Image: rechner image by eka from Fotolia.com)

Payroll expenses are a function of employee wages and payroll taxes. There are five main payroll taxes that must be reported and paid either monthly, quarterly or annually, depending on the gross amount of wages. Taxes include Social Security and Medicare (Known as FICA-Federal Insurance Contributions Act). FICA mandates that an employer withhold a set percentage of an employee’s salary each pay period, match the employee’s amount and contribute the money to a government account known as the Social Security Trust Fund. Other taxes that must be paid include Federal Unemployment, State Unemployment and Workmen's Compensation.

Things You'll Need

  • Calculator
  • Form 941 Federal
  • Form 940 Federal
  • State Unemployment Form
  • Bureau of Workmen's Comp Payroll Form
  • Payroll Report

Calculate Social Security taxes. The employee has 6.2 percent of his wages up to $106,800 (as of May 2010) withheld for payment of Social Security taxes The employer must pay an equal share for each employee's wages. The total amount of social security that must be paid is 12.4 percent of wages. 6.2 percent is withheld from the employee's paycheck and 6.2 percent is contributed by the employer. Form 941 is used to report wages, withholdings and calculate Social Security and Medicare taxes. Multiply .062 times total wages to figure Social Security tax expense. If the FICA taxes and withholdings exceed a certain amount, deposits must be made monthly at a financial institution or through the Department of Treasury website, EFPTS.org.

Calculate Medicare taxes. The employee must pay 1.45 percent of his or her wages for Medicare. Medicare taxes have no wage limit. The employer must pay an equal share of 1.45 percent for each employee's wages. The Medicare taxes are also reported on Form 941. Muliply .00145 times total wages to figure Medicare taxes. FICA taxes provide retirement income, as well as disability insurance, Medicare, and benefits for survivors.

Calculate Federal Unemployment tax. The employer must pay .8 percent of wages up to $7,000 for Federal Unemployment. This tax must be paid if an employer paid more that $1,500 in wages (as of May 2010) to employees during a calendar year. If the tax liability is more than $500 in any quarter, then weekly or monthly deposits are required. Federal Unemployment taxes are reported on Form 940 and must be filed, for example, for 2009 by February 1, 2010 (as of May 2010). If deposits were made throughout the year, the due date would be February 10, 2010

Calculate State Unemployment tax. Every state has different unemployment rates and rules. To calculate your State Unemployment tax, multiply wages by your tax rate. Many states will limit the tax a business must pay by specifying a maximum wage amount to which tax applies. Reporting and deposit requirements can be monthly, quarterly, bi-annual or annual, depending on the amount of tax due.

Calculate Workmen's Compensation. Workmen's Comp is a type of insurance that pays for employees who are injured in the course of employment. Every state has different rates depending on the type of work and experience rating of the employer. Most Workmen's Comp premiums will limit the tax by specifying a maximum wage amount to which taxes apply. Multiply wages by your tax rate to figure Workmen's Comp.

Total all payroll taxes above and add to total wages to get total payroll expenses.

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