When federal income taxes started in 1913, individuals paid them in a lump sum each April. Paying a large amount all at once proved to be a hardship for many taxpayers, so the current system of payroll deductions was adopted. The payroll deductions taken out of your paycheck are estimates based on how much you make each pay period, but do not take into account things like personal tax deductions or second jobs. Calculating payroll deductions is a little complicated because there are several taxes deducted from a paycheck, each with its own formula. However, once you know how each deduction is calculated, it’s actually a fairly easy process.
Total all wages and other compensation for the pay period. This is called the gross pay. Include regular pay, overtime, tips and commissions. Don’t include reimbursements for job-related expenses. For tipped employees, use the amount declared or the Internal Revenue Service (IRS) minimum required amount from Publication 15 Circular E, whichever is larger.
Calculate the payroll deductions for Social Security and Medicare. For Social Security, this is 6.2 percent of the gross pay until the year-to-date earnings have passed the annual cap. If earnings exceed that amount, no further Social Security deductions are required. For Medicare, the amount to be deducted is 1.45 percent of the gross pay. There is no cap on Medicare tax.
In 2013 there is an Additional Medicare Tax of .9 percent for single taxpayers who earn more then $200,000, married filing joint taxpayers who earn more than $250,000 and half that for married filing separate taxpayers. It will be withheld from an employee's paycheck once they reach the $200,000 mark.
Get the filing status and number of withholding allowances from your W-4 form. If the W-4 has not been filed, use single as the filing status and zero withholding allowances. Look in IRS Publication 15 Circular E for the current year to find the amount of a withholding allowance. This varies depending on the filing status and length of the pay period. For example, in 2012 the withholding allowance for single filing status paid weekly was $73.08.
Calculate taxable income. Multiply the number of withholding allowances by the amount from Publication 15 and subtract this sum from the gross pay to obtain the taxable income. For instance, a person who is single with two withholding allowances and makes $500 in a week has a taxable income of $500 minus two times $73.08, or $353.84.
Figure the federal tax to be withheld. Go to the percentage table in Publication 15 Circular E and look under the appropriate filing status. The federal income tax withholding is computed by using a series of percentages that increase as income rises. Continuing the example, the first $41 is not taxed. The amount from $41 to $209 is taxed at 10 percent. To this is added 15 percent of the amount over $209.
Check to see if you are in one of the 41 states that levies a state income tax. To figure state income tax, you’ll need current state instructions from the state Department of Revenue. These vary from state to state, although most use a sliding scale formula similar to the one used for federal income tax.
You may have other payroll deductions such as insurance or contributions to a savings plan that are specific to your employer. If you ask, your employer can tell you how to calculate these payroll deductions. Employers are responsible for some payroll taxes and may not deduct them from a person’s wages. These include matching contributions for Social Security and Medicare, and federal and state unemployment insurance.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.