How to Calculate Payroll Taxes

If you’re planning on starting your own business in which you will be hiring employees, it’s important to know how to properly calculate payroll taxes. If you start out not knowing about payroll deductions, you could make extremely costly mistakes that could potentially ruin your company financially. Taxes are serious business for the Internal Revenue Service, and mistakes, even seemingly innocent ones, may lead to you being criminally prosecuted and sent to jail.  

FICA Taxes

FICA taxes comprise Social Security and Medicare taxes. The total percentage of the FICA tax is 15.3 percent of gross pay per pay period. Social Security taxes account for 12.4 percent, and 2.9 percent is the Medicare portion of the tax. Employees are subject to half the total FICA tax, which is 6.2 percent for Social Security and 1.45 percent for Medicare. Employers are responsible for paying the other half of FICA taxes. The Social Security portion of the tax is capped at $108,500 gross yearly income. Any pay an employee earns above that is not subject to the 6.2 percent part of the FICA tax; however, there is no income limit for the Medicare tax portion of 1.45 percent.

Federal and State Income Taxes

The IRS and state governments provide businesses with yearly tax withholding tables. The amount of withholding depends on several factors, such as the duration of the pay periods, marital status of employees and how many dependents employees claim for taxes. The withholding information is provided by employees when they received and complete the W-4 form upon being hired by a business.

Unemployment Taxes

Employers are responsible for paying the entire percentage of both federal and state unemployment taxes. The federal unemployment tax rate is 6.2 percent of the first $7,000 that is paid to each employee. Unemployment tax rates and base income amounts vary among states. Unemployment taxes must be paid for all employees; however, the IRS has three employee classifications: Farm workers, Household workers and regular workers who earn at least $1,500 per year. Farm workers must earn at least $20,000 per year, and household workers must earn at least $1,000 per year for employers to be responsible for unemployment taxes.