How to Calculate Payroll Taxes

Both employers and employees are responsible for paying payroll taxes, a percentage of one’s salary or wages that the government uses to fund social insurance programs at state and federal levels. They will either be withheld from the employee paycheck, or employers would be required to pay them on behalf of the employees. So, you must learn how to figure payroll taxes whether you are employed or running your own business.

Payroll taxes may change over time. For example, if you used a 2009 payroll tax calculator, the results may vary compared to what you would get if you used a 2021 payroll tax calculator. So, it would be wise to keep track of taxation changes that occur.

When learning how to figure payroll taxes, you should know the types of payments you will make to the IRS.

Types of Payroll Taxes

Below are the main types of payroll taxes.

1. FICA Taxes

Social Security and Medicare programs fall under the FICA payroll taxes.

Social Security is funded by ​12.4 percent​ of the employee’s earnings. Both the employer and employee will be responsible for one-half of the contributions. So, if you are employed, you are responsible for paying payroll taxes of ​6.2 percent​ of your earnings into the Social Security program. However, the government can only tax your payments up to ​$142,800 ​for 2021 and ​$147,000​ in 2022.

In addition, you need to pay for Medicare through payroll taxes by contributing 1.45 percent ​of your earnings. The employer will cover the other half for a total of ​2.9 percent.​ And if you earn ​more than $200,000​, the employer is required to withhold an additional ​0.9 percent​ of your earnings.

2. Federal Unemployment Taxes

The Federal Unemployment Tax Act (FUTA) sets a rate of ​six percent​ for employers who pay an employee at least $1,500 in any given calendar quarter. However, it only applies to the first ​$7,000​ that the employer pays each employee. Further, the employee is not required to contribute anything toward the federal unemployment tax. Also, self-employed people and those who hire contractors do not pay it.

It is also worth noting that companies should only submit the payroll tax quarterly if they owe ​$500​ or more. Otherwise, they should carry it over until it exceeds the set amount. And if it does not, they can pay it annually.

However, companies that contribute toward the state unemployment insurance may receive a tax credit of up to ​5.4 percent​. That would bring their federal unemployment payroll tax rates to as low as ​0.6 percent.

3. Local Taxes

Different states and municipalities also set varying payroll state taxes that you may need to pay. These may include state income taxes, state disability insurance and state unemployment taxes. Some may be paid by employers, while employees may pay others. And others may require both parties to pay half.

How to Figure Payroll Taxes

Below is the procedure for figuring out payroll taxes.

  • Calculate your total earnings for the year.
  • Determine your FICA tax portion: If you are employed, you will be required to pay 6.2 percent. But if you are self-employed, you have to pay for both portions, which means you will need to pay 12.4 percent. For example, if you earn $100,000 in 2021, you will need to pay $6,200 if you are employed or $12,400 if you are self-employed as payroll FICA taxes.
  • Determine your Medicare tax portion: It is 1.45 percent regardless of your earnings. For example, if you earn $100,000 and are employed, you will need to pay $1,450. If you are self-employed, your payroll tax contributions will be $2,900.
  • Determine your share of the federal unemployment taxes: If you are self-employed or an employee, you will pay zero. But your employer will need to pay six percent of your earnings up to $7,000. So, if you earn $100,000, your employer must submit $420 on your behalf to the IRS.
  • If your state or municipality also sets payroll taxes, calculate them.
  • Add up everything you owe to determine the total you owe the IRS: Based on the above example, assuming you are employed and are not required to pay any local payroll taxes at the state or municipal level, you will need to pay $6,200 for Social Security and $1,450 for Medicare. That adds up to $7,650 as your portion. Your employer will need to pay the remaining half.
  • On the other hand, if you are an employer with an employee earning $100,000, you will need to pay the IRS $7,650 and an additional $420 for federal unemployment taxes for a total of $8,080.