How to Figure Taxes for a Payroll Check
Payroll taxes are statutory (mandatory) deductions that employers are required by law to withhold from employees' paychecks. The Internal Revenue Service handles federal payroll taxes administration; the state revenue agency handles state income tax administration. Payroll tax calculation depends on the tax in question and the respective agency's guidelines. Payroll software simplifies payroll tax processing because the software embeds the tax rates into the system. Still, the payroll representative should know how to figure the taxes manually.
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Things You'll Need
- IRS Circular E
- Form W-4
- State withholding tax rate
- State withholding allowance certificate
Instructions
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Calculate federal income tax according to the employee's W-4 data and the IRS withholding tax tables (Circular E). Check Lines 3 and 5 of the W-4 for her filing status and allowances, respectively. The IRS gives an allowance for each dependent claimed; therefore the more allowances the employee claims, the less her taxable wages. You must use the Circular E to know the amount of taxes to withhold.
Suppose she earns $2,000 biweekly and claims single two. According to the 2010 Circular E's wage bracket method, the federal income tax withholding is $250 biweekly.
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Calculate Social Security and Medicare taxes. Compute Social Security tax at 6.2 percent of gross compensation, up to the annual wage base of $106,800. Compute Medicare tax at 1.45 percent of all gross compensation.
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Figure state income tax, if applicable. As of 2010, the following states do not charge state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. State income tax withholding procedures vary by state. In many cases, the process is comparable to federal income tax withholding. The employer uses the employee's state withholding allowance certificate and the state withholding tax tables to figure the tax. However, some states, such as Pennsylvania use a flat withholding percentage.
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Tips & Warnings
City or local income tax may apply. For example, New York City and Yonkers charge city income tax. To figure the withholding, the employer uses the employee's withholding allowance certificate and the New York taxation agency's NYS-50-T publication.
If Line 6 of the employee's W-4 indicates additional taxes to be withheld, include the extra amount in the total withholding for the pay period.
References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
