Employee payroll taxes include federal income tax, state and/or local income tax (if applicable) and FICA (Medicare and Social Security) taxes. The employer pays FICA taxes, and federal unemployment (FUTA) and state unemployment (SUTA) taxes. Payroll taxes are used to fund a variety of federal and state programs, such as national defense, public schools, and medical and retirement programs, respectively. The calculation for each tax varies.
Calculate federal income tax using the employee’s W-4 form and the Internal Revenue Service (IRS) Publication 15 (Circular E) withholding tax tables. Retrieve the employee’s filing status and number of exemptions (allowances) from the W-4. Use the IRS's Publication 15 (Circular E) percentage alternative or the wage bracket method to figure the tax. The percentage method may be used at any time. Use the wage bracket alternative when the employee has less than 10 exemptions and his income falls within the wage range.
For instance, say she earns $610 weekly and claims single/two. Based on page 39 of the 2012 Circular E, withhold $56 for weekly federal income tax.
Figure state income tax, if it applies. Note that Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming do not charge state income tax. If applicable, consult the employee’s state tax form for his filing status and allowances and use the state withholding tax tables to figure the tax.
For instance, say his state is Rhode Island. He earns $500 weekly and claims married/one. According to page 10 of the Rhode Island Employer’s Income Tax Withholding Tables, the state income tax would be $18.22 weekly.
Withhold Social Security tax 4.2 percent of the employee’s gross earnings, up to the annual wage base of $110,100 in 2012. For instance, say the employee earns $1,300 semimonthly.
Calculation: $1,300 x .042 = $54.60, semimonthly Social Security withholding.
The employer also pays 6.2 percent of Social Security tax for each employee.
Stop the withholding when the employee reaches the yearly wage limit. Continue it when the New Year begins.
Withhold Medicare tax at 1.45 percent of all of the employee’s gross earnings.
Calculation: $1,300 x .0145 = $18.85, semimonthly Medicare withholding.
The employer also pays a matching amount of Medicare tax for each employee.
Calculate federal unemployment (FUTA) tax--only the employer pays this tax. The 2012 FUTA tax rate is 6.2 percent of the first $7,000 in wages you pay to each employee.
For instance, say the employee earns $30,000 for the year. Your FUTA tax for just that employee for the year is $434 ($7,000 x .062).
If you paid state unemployment tax, you are eligible for a maximum credit of 5.4 percent against your FUTA tax. If the 5.4 percent credit applies, your FUTA tax rate is .8 percent. If your state has federal loans outstanding too long from the federal government for unemployment benefits, they are known as a credit reduction state and their 5.4 credit is reduced by .3 percent. See Resources for a list of 2011 credit reduction states.
Figure state unemployment tax--in most states only the employer pays this tax. Get your state tax rate and the wage limit from your state Department of Labor (DOL) agency. Then, multiply the wages paid to each employee (up to the wage limit) by the state tax rate to arrive at your SUTA tax. If you are an employer in Alaska, Pennsylvania or New Jersey, there is also state unemployment tax withheld from employees, in addition to the tax the employer pays.
Certain states also have a local income tax. Check with your local government offices to determine the tax rate and what it applies to.
In 2013, there will be an Additional Medicare Tax withheld by employers of .9 percent on taxpayers earning more than $200,000. This tax is in addition to the 1.45 Medicare tax. The employer does not have to match the Additional Medicare Tax.
- Internal Revenue Service: Publication 15 (Circular E) 2012
- Internal Revenue Service: State Without a State Income Tax
- State of Rhode Island: 2012 Withholding Tax Tables
- Internal Revenue Service: Employers in Credit Reduction States Must Adjust Their Unemployment Tax Liability on Their 2011 Form 940
- Internal Revenue Service: Questions and Answers for the Additional Medicare Tax
- In 2013, there will be an Additional Medicare Tax withheld by employers of .9 percent on taxpayers earning more than $200,000. This tax is in addition to the 1.45 Medicare tax. The employer does not have to match the Additional Medicare Tax.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.