How to calculate Payroll Taxes for SMBs

First, let’s put things into perspectives and why it’s so important for you to know how to calculate payroll taxes. Payroll tax has a critical impact on the employer and the employee. They effect the total wage expense incurred by the employer, the worker’s taxable income, personal tax liability, and the net take-home pay.

Each year tons and tons of money are thrown into accountants to calculate the simplest things. When it comes to calculating payroll taxes most people would just rather let their accountant do whatever they need to do and leave it to them with their all mighty number two wizard wands and their clicky-box-thingy with numbers appearing. So here are a few steps to assure you that you do not have to know magic or to be a wizard in order do it yourself. Below are the step-by-steps and guild line where you can use to make things easier for you and your business.

IRS withholding calculator

Before you begin, you can use the IRS withholding calculator could help determine the correct withholding amount. The calculator requires you to enter your marital status, number of dependents you’re claiming, your gross wages, how often you’re paid (weekly, bi-weekly, monthly, etc.), etc. Enter the total federal withholding payments year-to-date and the system will estimate your required withholdings. After you receive your estimate, you can refer to the official IRS tables to determine how much to withhold through the reference of your filing status and pay period.

So, now we got that out of the way, let’s begin! First, understand what withholdings are and how to calculate them. Withholdings are broken down into several categories; federal and state tax, Social Security, and Medicare tax.

Federal and state tax

For federal and state income taxes, apply the IRS rules to compute federal tax withholdings from gross pay. The determination of the employee’s gross pay includes hourly wages, tips, and bonus compensations. With that being said, workers will also provide their employers their filing status and the number of allowances they would like to file and these allowances will be used to calculate the gross pay. From the W-4 form, indicate the number of allowances and locate the employee’s marital status. This include whether your employee marital status as married, single, or some other status as listed on the form. The number of allowance can determine how much is withheld from the employee’s pay to cover their income taxes i.e.; more allowances means less money is withheld for taxes. After you’re finish filing for yourself, your significant other, and/or children, go to the IRS withholding calculator to give it a test.

Social Security and Medicare tax

Next, adding the Social Security and Medicare tax. The Social Security is a federal program that provides retirement income and disability income. For Social Security, the employee must pay this until they reach the wage based limit and if the earning is above the wage base limit, they generally are not subjected to social security tax.


Medicare on the other hand provides medical coverage to both the elderly and disabled and both programs are funded through payroll tax withholdings. Medicare has no wage base limit and this means that each dollar of gross pay is assessed the Medicare withholdings tax. For single employees making over $200,000 a year have an additional 0.9% Medicare tax for every pay period after $200,000 in wages have been paid; the dollar threshold is $250,000. More married couples filing jointly and this includes all pay during the entire year.

Now that you know, in this section you’ll learn about your employer’s benefits and the difference between FSA and HSA.

Employer’s benefits

So let’s take a look at your employer’s benefits. Your employer may offer benefits that are funded through payroll deduction; some are made on a pre-tax deduction and reduces the amount of pay that is subject to taxation. For example, retirement plans or a 401(k) plan (Those that work for non-for-profits or government agencies may use a 403(b) plan instead) can be made on a pre-tax basis. A larger retirement balance will acquired if the employee contributes more in the beginning, and the taxation on these plans occurs when the dollars are taken out at retirement.

Flexible spending arrangement

FSA stands for “flexible spending arrangement” and it’s a voluntary arrangement with your employer that allows you to be reimbursed for medical expenses. The funds in this account do not roll over if not used within a year’s time. It’s another benefit that may affect your gross pay since it’s funded by payroll deductions though your employer may also contribute and the contributions from your employer do not have to be added to your gross income.

HSA – Health saving account

HSA stands for “health saving account.” There isn’t much difference in between FSA and HAS, the only difference is HSA allows the employee to roll over from year to year and allowing them to accumulate savings specifically set aside for health care. In additional to that, HSA also remains with you if you switch employers or leave the workforce entirely.

For employers, calculating state tax is very similar to calculating the federal tax in exception of tax rates being different. It is recommended to pay their state unemployment tax early. The benefits include a 5.4% credit on their federal calculation. However, if you wish to take full credit, the federal tax would decline to 0.6% of the first $7000 in wages paid. Each state has its own tax laws and it is recommended that employers should find out these information through the state’s department of revenue or taxation, especially if they employ in multiple states.

Finally, for those that wishes to use third party software with their calculations, be aware for any necessary updates such as tax laws or tax code changes. Here’s a few things to know about payroll companies; each type of payroll tax uses a different tax payroll company, a payroll company can take your employee data and make the necessary payroll calculation, and they can setup a system to pay electronically.

Thanks for reading to the end, I hope all this information helps. For next year’s tax season, you can finally dust your hands and crack your knuckles while your colleagues, friends, or ex-employer quivers over the mighty feet of the accountant. If you need any help for your tax services, visit website for more information.

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