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As an employer, you must withhold federal income tax and Federal Insurance Contribution Act (FICA/social security) for each employee. You are also responsible for remitting Federal Unemployment Tax Act (FUTA) paid entirely by you. If your state has income tax, you will need to withhold that as well. Unless you do business in Ohio or Pennsylvania, you will also need to contribute to your state’s unemployment system.

You do not need to withhold payroll taxes for anyone who works for you as an independent contractor. However, you need to ensure that the worker meets the definition of independent contractor or you could face penalties by the IRS. If you can answer yes to these questions, the person is an employee and you must withhold payroll taxes:

  • Do you control when and how the worker performs the job?
  • Do you reimburse job-related expenses?
  • Do you have a written contract with the worker or does the worker receive benefits?
  • Do you expect the work relationship to continue indefinitely and does the worker’s position play a key role in your business?

We provide a step-by-step guide to calculating payroll taxes below.

Start by Determining Each Employee’s Gross Pay

If you have hourly employees, add the hours they worked during a week and multiply it by their hourly rate. For example, the gross pay of an employee who earns $25 an hour and worked 40 hours a week would be $1,000. Don’t forget to add overtime hours at a rate of one and one-half the hourly rate if the employee worked more than 40 hours in a week.

Employees paid on salary typically have the same gross amount each pay period. To determine gross salary, divide the employee’s annual salary by the number of pay periods in a year. A salaried high-level manager earning $100,000 per year would have a gross salary of $4,166 per pay period assuming your company operates on a bi-monthly cycle.

Use the IRS Payroll Tax Calculator to Determine Withholding Amounts

In addition to each employee’s gross pay, you will need their filing status and number of exemptions from the W-4 form they completed with new hire paperwork. You then look up how much to withhold with the manual payroll tax calculator from the IRS to determine federal tax withholding. Be sure to check with your state taxing authority to determine the amount of state tax to withhold.

FICA and Medicare are additional withholdings from every employee’s paycheck. The FICA rate is 12.4 percent for 2020 with you and the employee each paying 6.2 percent. The taxable wage base for social security (FICA) in 2020 is $137,200. Medicare is another 1.45 percent deduction from the gross amount of the employee earnings.

Employer-paid FUTA is six percent of the first $7,000 you pay in wages to each employee. If you’re self-employed, you pay 15.3 percent for the Self-Employment Contributions Act (SECA) instead.

Determine Your Payroll Tax Payment Schedule

After calculating payroll tax for every employee and determining the amounts you must pay as an employer, you need to check with the IRS and your state taxing authority about a payment timeline. You will need to remit payments according to that timeline to avoid penalties.

If all this sounds time-consuming and overwhelming, consider outsourcing your payroll to Palmetto Payroll instead. We do all the calculations, submit payroll taxes and reports, and provide you with regular payroll reports. Please contact us today to learn more about our services.