By law, employers must withhold and pay employee taxes to the government. Typically, these taxes include federal, state, Social Security and Medicare taxes. The amount of each tax depends on the type of tax. Each tax also has its own formula.
Calculate federal tax using the employee’s Form W-4 and the Internal Revenue Service's Circular E (Employer's Tax Guide) for the tax year you are computing (see Resources). The Circular E contains the two most common methods of figuring federal taxes on wages: the wage bracket method and the percentage method.
Use the wage bracket method if the employee’s income is within the wage bracket and if he has 10 or fewer allowances. Use the Form W-4 to determine his filing status and number of allowances. For instance, say the employee claimed single/two allowances and earned $500 weekly in 2010. Based on the 2010 Circular E (page 41), his weekly federal tax withholding is $33.
Use the percentage method if the employee’s income exceeds the wage bracket limit and if he has more than 10 allowances. With the above example, use the percentage method table on page 37 of the 2010 Circular E. Calculate as follows: $70.19 x 2 = $140.38; $500 - $140.38 = $359.62. Then, go to page 39 and calculate as follows: excess over 200 = $159.62 x 15 percent = $23.94 + $8.40 = $32.34 weekly.
Determine the state tax. Nine states do not impose income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. If your state charges an income tax, use the employee’s state tax form (comparable to Form W-4), and the state tax withholding tables. State withholding tables vary by state (see Resources).
For instance, say the state is Georgia, the employee earned $400 weekly and claimed single/one allowance in 2010. Withhold $15.48 weekly (see page 22 of the 2010 withholding tables). You can get the withholding tables from your local department of labor or online.
Calculate the Social Security tax. The government regulates the Social Security income tax rate. For 2010, the rate was 6.2 percent, up to the wage maximum of $106,800. For example, if the employee earned $650 biweekly in 2010, calculate as follows: $650 x .062 = $40.30 biweekly. Once the employee reaches the annual wage limit, stop the deduction. Resume it at the start of the next year.
Figure the Medicare tax. The government also sets the Medicare income tax rate. For 2010, the rate was 1.45 percent and there is no wage limit. Using the example in Step 3, calculate as follows: $650 x .0145 = $9.43 biweekly.
If you use payroll software, the income tax rates are hard-coded into the system, which automatically calculates the tax.
- If you use payroll software, the income tax rates are hard-coded into the system, which automatically calculates the tax.
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