The IRS (Internal Revenue Service) is very stringent in respect of payroll tax, its deductions, and its timely payment. A small mistake can land a business in serious problem with this regulatory agency. Most states have prescribed payroll structures in relation to the federal system planned by the IRS. The calculations and subsequent deductions have to be completed precisely, so as to avoid any disorder. Every business must have a functional payroll account, so that these deductions are paid to the state and federal governments at the conclusion of the financial year.
Payroll taxes comprises of State and Federal withholding, Medicare taxes, and Social Security taxes. The calculation of payroll taxes for employees is a mandatory part of conducting a business. In case, you are an employee or an employer, it is very important how to withhold amount and calculate payroll taxes.
Find out the employee’s gross income. Consider the total earnings for the employee’s income period. Take account of the hourly wages and bonus payment, excluding mileage and disbursement compensation.
Determine the employee’s filing category. This can be established on the Employee’s Form W-4. There will be different withholding amount both for the ‘Single’ and ‘Married’ status.
Determine the number of allowances or stipends. This can be established on the Employee’s Form W-4. Allowances or stipends are claimed by the employee, and find out how much is deducted from the employee’s salary to calculate the income tax. More the number of allowances denote that less money is deducted or withheld. Multiply the number of allowances or stipends by the amount of one deduction allowance. In this way, it is established how frequently the employee is remunerated.
With reference to the IRS publication, find out how much amount to deduct or withhold. At this moment, you can identify how much salary is going to be deducted or withhold for federal or state taxes. You can take help of the official IRS tables to find out how much amount to deduct or withhold. Always make certain to gaze at the table in relation to the Employee’s Filing category. The tables are easily available online.
Step 5: Medicare and Social Security withholding
1.Find out the Medicare withholding. In the year 2015, it is 1.45% of the employee’s gross income. There is no stipulated wage base limit for the Medicare withholding. The employees who are having income above over $200,000 in a year can get an extra 0.9% Medicare tax for every pay cycle after reaching the amount i.e. $200,000.
Find out the Social Security withholding. In the year 2015, it is 6.2% of the employee’s gross income. The employee is required to pay this amount until they attain the wage base limit ($118,500 for 2015).
Step 6: Federal and State Unemployment Tax
These taxes are paid by the employer. In a majority of states, the employer shells out the unemployment tax. After paying your state unemployment tax, you can even take a credit on the federal unemployment tax. Usually, the 2015 federal unemployment tax is about 6% of the initial $7000 you disburse as salary to an employee.
Step 7: State Income Tax Withholding or Deduction
Determine the state tax deduction guidelines for your employees. Since every state has different tax rules, you are required to find the proper tax information. You can locate the tax information through the State’s Department of Taxation or Revenue.
Understand that all states are not counting the similar wages as federal when going to calculate state tax. Make certain to verify the regulations for the state you’re going to calculate for.