First off, what are payroll taxes? These are simply federal, state and local taxes that employers hold back from their employees. The taxes include income tax, social security and Medicare taxes. To know how to calculate payroll taxes, you will need to know that Social security and Medicare taxes are referred to as payroll taxes. Unemployment taxes are paid by the employer and depend on the employee’s wages and other factors.
Income taxes are calculated by the IRS based on the details provided by the employee in the W-4 form, where the individual is required to declare the amount of withholding. An employee can declare more in withholdings than required by the IRS.
Now we come to the next question- how to calculate payroll taxes? For calculating payroll taxes, the employer must know the current tax rates. For the current year 2016, the Social security tax rate for employees and employers is 6.2% (unchanged from 2015), while the Medicare tax rate is 1.45% (also unchanged from 2015). The social security wage case limit is $118,500. Upon reaching these wages, the social security taxes will not be deducted anymore. Medicare taxes will continue despite the wages.
As mentioned earlier, unemployment taxes, namely FUTA (Federal Unemployment Tax Act) and SUI (State Unemployment Insurance) have to be paid by the employer. FUTA tax rate is 6% and for SUI taxes, a credit of up to 5.4% can be considered. FUTA base wage is $7000; once employee wages cross $7000 for the year, the deductions will stop.
While this may basically be what you need to know about how to calculate payroll taxes, it would be wise to seek professional help if you are doing it for the first time. You can also use business calculators which can help you make informed decisions. Calculating payroll taxes is not a task to be taken lightly if you are not sure what you need to do.