How to Calculate Payroll Tax Withholdings

File yearly W-2s showing employees' annual tax withholding with the Social Security Administration.

The federal and state government requires all employers to withhold payroll taxes from employees' income. The Internal Revenue Service administrates federal payroll taxes, including federal income tax, Social Security tax and Medicare tax. According to the IRS, it processed more than 236 million tax returns in 2009. The state taxation agency regulates state income tax. Employers are required to calculate and withhold payroll taxes according to the ruling agency's guidelines.

Things You'll Need

• Form W-4
• IRS Circular E
• Employee State Withholding Tax Form
• State Withholding Tax Procedure

Instructions

1. Calculate federal income tax. Use the IRS withholding tax tables (Circular E) and the employee's W-4 form to compute the withholding amount. See Lines 3 and 5 of the W-4 for the employee's filing status and allowances. Use Circular E for the tax year you are computing.

   Suppose the employee earns $1,500 semi-monthly and claims married with two withholding allowances. According to the 2010 Circular E, her federal withholding tax is $73, semi-monthly.

2. Figure Social Security tax at 6.2 percent of gross earnings, up to the annual wage limit of $106,800.

3. Compute Medicare tax 1.45 percent of all gross earnings; this tax does not have a yearly wage limit.

4. Calculate state income tax. Most states require state income tax withholding; calculate it according to your state's procedure. Suppose the worker is employed in Georgia. She earns $1,000 biweekly and claims single person with one withholding allowance. Consult the Georgia Department of Revenue Employer's Tax Guide for 2010 for the state withholding tax tables and her Georgia Employee's Withholding Allowance Certificate for her filing status and allowances. According to Georgia's withholding tax tables, the state income tax withholding is $41.40 biweekly.

Tips & Warnings

• Do not withhold federal income tax or state income tax if the employee claims exempt on the W-4 or state withholding allowance certificate.

• Occasionally, the local government may impose local income tax, such as school district tax. Additionally, the city may charge city income tax. Check with your state taxation agency for the withholding procedure for these types of taxes, if applicable.

• You can access your state withholding procedures via the revenue agency's website or by contacting the agency directly.

• Pay and report all payroll tax withholding according to the revenue agency's guidelines. Most employers are required to perform quarterly reporting with the IRS and to pay their federal payroll tax withholding either semi-weekly or monthly.

References

• IRS: 2010 Circular E
• Georgia Department of Revenue: 2010 Employer's Tax Guide
• Social Security Administration: Social Security and Medicare Tax Rates
• IRS.gov: The Agency, its Mission and Statutory Authority
• Georgia Department of Revenue: Employee's Withholding Allowance Certificate

Resources

• IRS.gov: State Revenue Sites
• Tax-Tables.org: Withholding Tables