How Payroll Tax Is Calculated? | Federal, State, And Local Tax Guide
There are a number of types of payroll taxes that are each calculated differently. Payroll tax is the gross income minus any expenses incurred, and this guy will help you determine how much money you should be withholding for tax purposes.
It’s important to know that it can be very complicated and time-consuming calculating taxes, and this is something you cannot afford to get wrong. If you’re unsure, consider outsourcing to a payroll service. They are typically considerably less expensive than most people think.
Having a collaborative, team-focused environment is an amazing thing in company culture. That is your utopia. You want your employees to love the company they work for.
When you get into the nitty-gritty details of human capital management, that can be a lot to manage and like a complex spider web of details.
“Where do I go next for answers? I don’t understand what this is,” you think to yourself.
We would like to simplify one part of HR and accounting, to help you so you can go back to focusing on happy employees. Let’s break down how payroll tax works.
Yes, this is the most important part of payday. Payroll runs and you take out taxes.
Payroll Tax Defined
Some people believe that payroll taxes are just the taxes that you withhold from the paychecks of your employees. For employment taxes, payroll taxes are only one piece of the puzzle.
Payroll taxes comprise self-employment taxes and FICA, or the Federal Insurance Contribution Act. We cover social security and medicare taxes in both FICA and self-employment taxes.
Many employers calculate payroll taxes for their employees and withhold them from their gross taxable wages.
How about you and your self-employment taxes? Do you need to calculate that for yourself? It depends on your business entity and what type it is.
Usually, you pay self-employment taxes if you don’t take a salary as your employees do.
Gross Taxable Wages Defined
What is gross taxable income? This is the money an employee earns and is liable to for income withholding tax and/or FICA.
Pre-tax deductions and non-taxable income are not included in taxable wages. This can include items like:
- Qualified medical insurance deductions
- Qualified dental insurance deductions
- HSA and FSA contributions
- 401k and 403b contributions
- Other Employment Taxes
Now, let’s move on to income and unemployment taxes. Unless your employee has exemptions from income taxes, you must withhold income taxes.
Income taxes by type include:
- Federal taxes – See here for tax estimator
- State taxes
- Local taxes
A completed W-4 form will help you identify if the employee has exemptions.
Payroll Tax Deferral 2020
The Coronavirus, Aid, Relief, and Economic Security Act gave employees a needed financial boost temporarily. They allowed payroll tax deferral on withholdings for the 2020 tax calendar year according to IRS Notice 2020-65 PDF. The payroll tax deferral will need to be paid by employers by the applicable deadlines.
Many states require an income tax. If you are in one state that requires state taxes income withholding, your employees will complete a W-4 form. The W-4 will tell you how much to deduct for withholdings each pay period. The easiest way to calculate your state tax rate would be to go to your states .gov site, For example, in Virginia, you would visit https://www.individual.tax.virginia.gov/calculators/income-tax-calculator.cfm.
For local income taxes, you will want to contact your local government and verify if you need this for payroll tax.
Next, employment taxes include unemployment as a type of tax they require you to pay. Different from income taxes, usually employers are the ones who pay unemployment taxes.
There are two types of unemployment taxes. These are:
- FUTA (federal unemployment tax)
- SUTA (state unemployment tax)
Unemployment tax contributions are much like payroll taxes. We base them on the gross wages of your employees.
It’s good to remember that unemployment and income taxes we do not base on payroll taxes.
Calculating Payroll Taxes
Now that we have gone over the taxes, let’s move on to calculations. As we’ve talked about, FICA and self-employment taxes make up part of payroll taxes. Here are more details on the rates.
FICA Tax Calculation
Both employee and employer-paid, FICA tax is used to pay for Medicare and Social Security. You and your employee, both separately, pay equal amounts. Employees contribute 7.65% in total and you match that by also paying 7.65%.
Social Security Tax Calculation
Every employee pays a rate of 6.2% for Social Security tax. You match this, also paying 6.2% for each employee. For example, if an employee has $2,000 in gross wages for one pay period, both you and the employee each pay the same amount of $124, which is 6.2% of $2,000.
For the year 2021, $142,800 is the wage base for Social Security.
What Is a Wage Base?
This means that employees must continue to pay Social Security taxes until they meet the wage base in their gross taxable income for the calendar year. So, employees pay Social Security taxes until they reach annual wages of $142,800.
Once an employee earns $142,800 in the calendar year, you’ll cease withholding from their paychecks Social Security taxes. And, you can stop contributing, too, to your match for the employee.
The rate for Medicare taxes is 1.45%. Just like Social Security, each employee pays this amount and you, as the employer, match it.
Unlike Social Security, there is no wage base. While there is no wage base, there is an additional Medicare tax rate for an employee after they reach a certain wage. This added tax rate is 0.9%.
The employee’s filing status determines when there is an additional rate. They are:
- Single is $200,000
- Married filing jointly is $250,000
- Married filing separately is $125,000
Based on these figures, if an employee reaches over the threshold, you’ll calculate 1.45% plus the added 0.9% Medicare tax. As the employer, the additional Medicare tax is not for you to contribute.
Now, self-employment is not like FICA. The employers do not match the rate; you don’t share the responsibility with the employee. Rather, you contribute to Medicare and Social Security taxes with 15.3%.
SECA or the Self-Employment Contributions ACT we know tax as self-employment taxes. The total is 15.3% SECA tax.
You calculate the separate amounts as:
- 12.4% goes to Social Security
- 2.9% goes to Medicare tax
You do not pay Social Security taxes after you earn $142,800.
Also, you don’t need to pay the added 0.9% for Medicare tax if your gross taxable wages are over the added Medicare tax threshold. The added Medicare tax by wages is the same for SECA, just like FICA.
If you want to find the amount of self-employment tax, they require you to pay for the calendar tax year, file a Schedule SE. You can attach this form to Form 1040, which is part of the US Individual Income Tax Return.
Tax Problems Solved – Get The Help You Need
Now that you know more about how we calculate payroll tax, we can help you with other parts of your business too. If you can imagine a business where everyone wins, then you are imagining us!
The suppliers you need can come directly to you with their pricing at up to 40% savings! One website, one form, that’s all it takes. If you prefer to take the headache and a calculating taxes consider getting quotes for outsourcing your payroll. You might be surprised to learn how inexpensive it really is.