How To Calculate Payroll Tax In the United States: Examples & Tips for Employers

What Are Payroll Taxes, and Why Are They Important?

Payroll taxes are mandatory contributions that both employers and employees must pay to fund government programs. This includes Social Security, Medicare, and unemployment insurance. These taxes help support critical social services, ensuring that retired individuals, unemployed workers, and those in need of medical assistance receive financial aid.

For employers, accurately calculating and withholding payroll taxes is necessary for a few reasons. It helps provide a full view on the cost of your employees, and is critical for legal compliance and efficient payroll management. Failing to do so can result in penalties, fines, and legal issues. In addition, accurate paycheck deductions help to build employee trust.

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Types of Payroll Taxes

Payroll taxes can be categorized into taxes withheld from employees’ wages and those paid directly by employers. The employer withholds federal income tax, Social Security, Medicare, and state taxes as required. 

Below are the primary types of payroll taxes:

1. Federal Income Tax

Employers must withhold federal income tax from employee wages based on their earnings and withholding selections on Form W-4. The amount withheld depends on the employee’s taxable wages, marital status, and allowances.

2. Federal Insurance Contributions Act (FICA) Taxes

FICA taxes consist of Social Security and Medicare taxes, which are shared between employers and employees:

• Social Security Tax: 6.2% (employee) + 6.2% (employer) = 12.4% total, up to the annual wage base limit ($160,200 in 2023).
• Medicare Tax: 1.45% (employee) + 1.45% (employer) = 2.9% total.
• Additional Medicare Tax: Employees earning over $200,000 (single) or $250,000 (married) must pay an extra 0.9% (not matched by the employer).

3. Federal Unemployment Tax Act (FUTA)

FUTA is an employer-paid tax that funds unemployment benefits. The standard FUTA tax rate is 6.0% on the first $7,000 of an employee’s wages. Most employers qualify for a credit up to 5.4%, reducing the effective tax rate to 0.6%.

4. State Income Tax

Many states impose state income taxes, requiring employers to withhold the appropriate amount based on state tax tables. Some states, such as Texas and Florida, do not impose state income taxes.

5. State Unemployment Tax Act (SUTA)

SUTA taxes are employer-paid contributions that help fund state unemployment programs. Each state sets its own SUTA tax rates, which may vary based on the employer’s industry and history of layoffs.

6. Local Payroll Taxes

Some cities and municipalities impose local payroll taxes in addition to state and federal taxes. These may include local income tax, school district tax, or city-specific business taxes.

Understanding these payroll tax categories ensures employers accurately withhold, contribute, and comply with tax regulations to avoid penalties and maintain smooth payroll operations.

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What Do You Need to Calculate Payroll Tax?

Before calculating payroll taxes, employers must gather specific information about their employees and payroll setup. This includes tax forms, employment classification, and details about deductions. Having accurate documentation paves the way for proper tax withholding and compliance with federal and state regulations. Here’s everything you’ll need to calculate taxes on payroll:

W-4 Certification

The Form W-4, also known as the Employee’s Withholding Certificate, is completed by employees upon hiring. It provides information on their tax filing status, dependents, and additional withholding preferences. Employers use this form to determine the correct amount of federal income tax to deduct from each paycheck.

I-9 Form

The Form I-9 is required for all U.S. employees to verify their identity and work authorization. Employers must collect and review this form along with supporting documents (such as a passport or Social Security card) to ensure the employee is legally eligible to work in the United States.

State Withholding Forms

Many states require a separate state withholding form in addition to the W-4. This form determines the correct state income tax withholding based on the employee’s residence and work location. State tax agencies provide these forms, and requirements vary by state.

Employment Status

It’s essential to classify workers correctly as either employees or independent contractors to avoid the pitfalls of employee misclassification. Employees have payroll taxes withheld, while independent contractors are responsible for paying their own taxes. Misclassification can lead to steep penalties and back taxes.

Taxable Deductions

Some deductions, such as health insurance premiums, retirement contributions, and pre-tax benefits, reduce an employee’s taxable income, ultimately affecting their home pay. Employers must correctly account for these deductions before calculating payroll taxes to ensure compliance and accuracy.

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How to Calculate Payroll Taxes

So, how do you calculate payroll taxes in practice? This step-by-step guide will walk you through the details, including necessary forms, calculations, and best practices.

1. Calculate Employees' Gross Pay

Gross pay is the total amount an employee earns before deductions.

• Hourly Employees: Multiply the number of hours worked by their hourly wage. Overtime (hours over 40 per week) is typically paid at 1.5 times the hourly rate.
• Salaried Employees: Divide the annual salary by the number of pay periods (e.g., biweekly = 26 pay periods per year).

Example Calculation:

An hourly employee works 45 hours per week at $20 per hour:

• Regular pay: 40 hours x $20 = $800
• Overtime pay: 5 hours x ($20 x 1.5) = $150
• Gross Pay: $950

A salaried employee earning $52,000 annually with biweekly pay:

• $52,000 / 26 = $2,000 per paycheck

2. Determine Payroll Taxes Owed

Employers must withhold and contribute to several payroll taxes.

Federal Income Tax Withholding

Federal income tax is based on the employee’s Form W-4 and IRS tax tables. Employers follow these steps:

1. Refer to the employee’s filing status (single, married, head of household).
2. Find the appropriate bracket in IRS Publication 15-T.
3. Subtract any pre tax deductions (e.g., health insurance, 401(k)).
4. Apply the tax bracket to determine the withholding amount.

FICA Taxes (Social Security and Medicare)

Employers and employees share responsibility for Federal Insurance Contributions Act (FICA) taxes.

• Social Security Tax:
  
  • Rate: 6.2% (employee) + 6.2% (employer) = 12.4% total
  • Applies to wages up to the annual limit ($160,200 in 2023)
• Medicare Tax:
  
  • Rate: 1.45% (employee) + 1.45% (employer) = 2.9% total
  • Additional Medicare tax of 0.9% on wages exceeding $200,000 (employer does not match this)

Federal Unemployment Tax (FUTA)

Employers pay FUTA tax to fund unemployment benefits. Refer to the employee’s filing status (single, married, head of household), as their marital status affects how much federal income tax is withheld.

• Rate: 6.0% on the first $7,000 of each employee’s wages
• Most employers qualify for a credit up to 5.4%, reducing the effective rate to 0.6%

State and Local Taxes (If Applicable)

• State Income Tax: Varies by state; some states have no income tax.
• State Unemployment Insurance (SUI): Rates vary based on state and employer history.
• Local Taxes: Some cities and municipalities impose additional payroll taxes.

3. Subtract Post-Tax Deductions

After calculating tax withholdings, deduct any post-tax contributions, such as:

• Wage garnishments (e.g., child support, court-ordered payments)
• Union dues or voluntary benefits

4. Calculate Employer’s Share of Payroll Taxes

Employers contribute additional payroll taxes beyond employee withholdings:

• Social Security: 6.2%
• Medicare: 1.45%
• FUTA: 0.6% (after credits)
• SUI: Varies by state

Example Calculation:

For an employee earning $4,000 per month:

• Social Security (6.2%) = $248 withheld + $248 employer match
• Medicare (1.45%) = $58 withheld + $58 employer match
• FUTA (0.6%) = $24 (if under wage limit)

5. Double-Check for Accuracy

Accurately completing payroll tax calculations for your workforce can get complex, requiring attention to numerous details and regulatory requirements. Here are our top tips to prevent errors in the process:

• Verify W-4 data matches withholding amounts, ensuring that employee withholding preferences are accurately reflected in tax deductions.
• Check wage base limits for Social Security and FUTA to avoid over or underpayment of taxes.
• Use payroll software to automate calculations, reduce errors, and maintain compliance with evolving tax regulations.
• Employers can also leverage comprehensive global payroll analytics software to gain insights into tax compliance, payroll trends, and potential discrepancies in tax reporting.
• Conduct periodic payroll audits to catch errors before filing tax returns, ensuring accurate reporting and payments.

6. Deposit Payroll Taxes

Employers must deposit withheld and employer-paid taxes on a regular schedule.

• Federal taxes (income tax, Social Security, Medicare):
  
  • Use the IRS EFTPS (Electronic Federal Tax Payment System).
  • Deposits are due semi-weekly or monthly, based on payroll size.
• FUTA: Deposited quarterly.
• State taxes: Deadlines vary by state.

7. Making Payments to the IRS

Employers must report payroll taxes regularly.

• Quarterly Forms:
  
  • IRS Form 941: Reports withheld federal income tax, Social Security, and Medicare.
• Annual Forms:
  
  • IRS Form 940: Reports FUTA tax.
  • IRS Forms W-2 and W-3: Report wages and withholdings.
  • State-specific forms as required.

8. Maintain Records

Keep payroll records for at least 3–7 years, including:

• Employee W-4 forms
• Payroll reports and pay stubs
• Tax deposit receipts and filings

9. Use Tools or Outsource If Needed

Many businesses use payroll software (e.g., Playroll, Gusto, QuickBooks, ADP) and payroll analytics to simplify payroll tax calculations and ensure compliance. Some may also outsource payroll management to professionals or accountants. Employers should maintain detailed payroll accounts to track employee wages, tax withholdings, and employer contributions accurately.

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Examples of Payroll Tax Calculations

To better understand payroll tax calculations, let’s consider two scenarios: one for an hourly employee and another for a salaried employee.

Example 1: Hourly Employee

An hourly worker earns $20 per hour and works 45 hours in a week.

• Regular Pay: 40 hours × $20 = $800
• Overtime Pay: 5 hours × ($20 × 1.5) = $150
• Gross Pay: $950
• Federal Income Tax (estimated): $120
• Social Security Tax (6.2%): $58.90
• Medicare Tax (1.45%): $13.78
• State Income Tax (varies by state, assume 5%): $47.50
• Net Pay (after tax deductions): $709.82

Example 2: Salaried Employee

A salaried employee earns $60,000 per year and is paid biweekly.

• Gross Pay per Paycheck: $60,000 ÷ 26 = $2,307.69
• Federal Income Tax (estimated): $280
• Social Security Tax (6.2%): $143.08
• Medicare Tax (1.45%): $33.46
• State Income Tax (5%): $115.38
• Net Pay (after tax deductions): $1,735.77

These examples illustrate how different tax components affect employee take-home pay.

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Guarantee Global Compliance With Playroll

Employers play a critical role in withholding and remitting payroll taxes, including federal, Social Security, Medicare, and state-specific taxes. Errors in tax calculations can lead to costly penalties and legal complications. 

This doesn’t have to be complex – leverage comprehensive payroll software and global HR experts like Playroll to simplify tax compliance and audits. Book a demo with our team to find out how we can help your team scale and avoid the compliance and payroll complexities.