How to Determine Withholdings on Payroll Checks
The Internal Revenue Service requires you to withhold payroll taxes from employees’ income and pay it according to its regulations. These taxes include Social Security (SS) tax, Medicare tax, federal income tax, and most likely, state income tax. The federal government sets the calculation standards for Social Security tax, Medicare tax and federal income tax. The state taxation (revenue) agency mandates the criteria for state income tax. You have to stay abreast of payroll tax laws, which can be changeable, to ensure accurate withholding.
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Instructions
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Find out the Social Security tax. For years 1990 and later, the rate is 6.2 percent of gross earnings. The yearly wage limit is $106,800 as of 2010. Suppose the employee earns $650 weekly. The calculation would be: $650 x .062 = $40.30 weekly withholding.
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Figure out the Medicare tax. For years 1990 and later, the Medicare rate is 1.45 percent of all gross earnings. Suppose the employee earns $1,175, biweekly. The Medicare calculation would be: $1,175 x .0145 = $17.04 biweekly withholding.
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Find federal income tax. This tax depends on the employee’s income, number of allowances and filing status. You can get the filing status and allowances from the employee’s W-4. The employee is not subjected to any withholding if he claims “exempt” status on his W-4 form. You also need the IRS Circular E for the tax year you are computing. The Circular E has the federal withholding tax tables. Suppose the employee earns $1,800 semimonthly and claims married with three allowances. The 2010 Circular E says you should withhold $95 from each of her semimonthly paychecks.
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Withhold state income tax according to your state’s rules. If the tax applies, use the employee’s state income tax form and the state withholding tax tables to figure the withholding amount. Suppose the employee’s work state is Rhode Island and she earns $2,000 monthly and claims single with one allowance. The Rhode Island 2010 withholding tax tables say you should withhold $54.93 from each of her monthly paychecks.
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Tips & Warnings
Payroll software can calculate the tax withholding for you. It has the rates hard-coded in the system.
If the employee changes his W-4 or state income tax withholding conditions, calculate the withholding based on the changes. For example, if he changes his filing status from single to married, use the tax tables for married instead of single.
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