Calculating total payroll is never as simple as most people think it is--"X" amount times "Y" hours gives you "Z" pay. Taxes must be considered, both for the employer and the employee, benefits, workers' comp, state unemployment (SUTA) and federal unemployment (FUTA) to consider and caps on certain amounts that get reached at different levels. All this must be factored in when calculating payroll percentages.
A large part of calculating payroll is employer matching taxes--those amounts that employers must pay to state and federal governments for the privilege of hiring someone else to work. These taxes include FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act). There is also workers' compensation insurance, which must be paid by the employer.
Assuming an employee makes $25 per hour and works 40 hours in one week they will earn $1,000. To calculate the employer percentages for payroll you will:
- Multiply the $1,000 by the FICA percentage (which in 2009) is 7.65 percent, or $76.50.
- Multiply the $1,000 by the FUTA percentage which is .80 percent, or $8, in this case.
- Multiply the $1,000 by your company's SUTA percentage which is a base number, plus or minus any discounts or penalties you must pay. As an example, Arizona State SUTA is 2.0 percent base, or $2 for our current employee.
- Multiply the $1,000 by whatever workers' compensation risk code has been assigned to the employee for the job that they do. For example, if he is clerical, the code is 8810. The rate for that code will vary, depending on what state you are in, and discounts or premium modifiers offered by your insurance company, but a base rate in Arizona State is 28 cents for every $100 the employee earns. More risky positions get more expensive workers' compensation codes. Assuming our employee is clerical and paying the base rate, that would be $2.80.
Adding these amounts together, we come up with $89.30. This is the amount the employer will have to pay out of company profits/funds--not to be taken from the employee. Note that some taxes have a cap assigned to them, such as FICA, which means that once the employee has earned a certain pre-tax amount for the year (currently $106,800), you no longer have to pay the Social Security portion of FICA for that employee, and the employee does not have to pay it either.
Employees have their own taxes to pay as well and it is generally the employer's responsibility to withhold the tax amounts from the employee's pay and submit it to the proper state and federal authorities in a timely manner.
- The employee pays the same FICA amount as the employer, so in our example, you would withhold $76.50 from the employee's pay.
- The IRS website has current tables for calculating employee withholding percentages. You can use these to figure out how much to withhold for federal taxes based on what the employee indicated on her W-4 form. How much you will tax here is not necessarily gross income, but taxable income, which may be different. Certain deductions, such as health insurance and 401(k) contributions, are not taxed, which means you must deduct those amounts from the employee's pay before you calculate their taxes.
- Your state government should also have a website available for information or tables on how to calculate the employee's state taxes (if any). Many states use a simple percentage amount of the federal tax withheld. Some states use a withholding form and formula independent of federal taxes. For example, if your state's rate was 10 percent of federal taxes. In this case, you would withhold $7.65 from the employee's pay.
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