How confident are you in your math skills? If you’re planning to manage payroll taxes for your small business yourself, ideally, you are pretty confident. After all, when it comes to calculating these for your business, the consequences for getting things wrong can be costly. 

As a small business owner, you know you don’t have time to waste on complex calculations - nor do you want to waste money on tax-related fines and other payroll tax liabilities if your calculations are incorrect. You need to be able to calculate payroll taxes for your business quickly and accurately every time.

If payroll tax calculations and other aspects of payroll compliance feel intimidating to you, don’t start to sweat just yet! Keep on reading. This post will cover some of the steps, tips, and tricks we recommend for calculating payroll taxes.

Struggling to Calculate Payroll Taxes?

Before we get into the nitty-gritty of calculating payroll taxes, let’s discuss what payroll taxes are and what they’re for. Payroll taxes are the taxes paid by both employers and employees on the employees’ wages or salaries. Funds from these taxes are then doled out to various social insurance programs, like Social Security (FICA) and Medicare (MEDFICA). Generally speaking, employers pay half of the taxes, and the employees cover the other half. 

As with any government regulation, considering payroll taxes can feel like a daunting and confusing task. However, it doesn’t have to be such a headache. ConnectPay can help your business with all its payroll needs, taking the burden of understanding calculations and regulations off of your shoulders. You can schedule an appointment with one of our reps today and read on to learn the basics of payroll tax calculation.

More Information: 6 Pillars of Payroll

Step 1: Complete Required Paperwork

Technically, this step comes before payroll is processed. Before a new hire receives their first paycheck, there are several documents you will need to have on file for them. For taxes, you will need to have your new employee complete both state and federal W-4 forms. Please note that, as of 2020, there is a new Form W-4 from the IRS. Your new hire will also need to complete an I-9 verification. This isn’t directly related to payroll processing, but it is a legal requirement for onboarding a new employee. 

Some other paperwork you may want to have your employees complete include direct deposit forms for paperless payroll. You’ll also want to get acknowledgments of receipt of their employee handbook and employment agreement, signifying their acceptance of their pay and benefits package.

Step 2: Calculate Gross Earnings

Once all your paperwork ducks are in a row, you can begin the actual calculations. First, you’ll need to calculate your employees’ gross earnings for the pay period in question. The appropriate calculation is below:

[Employee Hourly Rate] x [Number of Hours Worked] = Gross Earnings

And just like that, part one of your calculation is done! Easy peasy.

Step 3: Account for Tax Withholdings

Once you know each employee’s gross earnings for the pay period, the next step is to account for the tax withholdings for each worker. What withholdings and allowances did they note on their W-4? Be sure to consider federal, state, and FICA taxes. We’ll discuss each in more detail below:

• Federal Allowances: Federal withholdings are calculated using the employee’s gross pay and the current IRS Tax Tables. You can calculate this by hand or invest in a payroll service provider capable of calculating this for you.

• State Allowances: The state and local allowances that will apply for your business and your employees will depend upon the location of your business or the residences of your employees if they’re across state lines. There may also be additional considerations for payroll compliance if you’re a multistate employer.

• FICA: FICA combines both Social Security and Medicare taxes. A total of 7.65% must be withheld for FICA. As a note, if the employee makes over $142,800 per year, their Social Security withholdings will cap at that rate. There is no cap for Medicare taxes. Additionally, any employees earning over $200,000 per year will need to pay an additional .9% surtax for Medicare. 

Step 4: Deductions and Reimbursements

The last step to calculating payroll taxes is taking stock of any deductions or reimbursements that apply to each employee. Deductions include things like health insurance premiums, HSAs, and retirement plans like 401(k) plans, as well as wage garnishments. The critical thing to consider here is which deductions are pre-tax and which are post-tax. Be sure to identify and handle each deduction appropriately. 

Expense reimbursement also comes into play here. Your business may process expense reimbursements in an off-cycle payroll process, but if it is a part of your regular payroll process, then considering those reimbursements here is doubly essential. These funds aren’t part of your employee’s wages, so they shouldn’t be included in the tax calculation. These funds are tacked onto your employees’ pay after all applicable taxes have already been deducted.

Bonus Tip: Outsource Your Payroll Tax Calculations

Does the process of calculating payroll taxes still feel a bit overwhelming? If so, you’re not alone. Many small businesses outsource their payroll processes. This can give them peace of mind, knowing their calculations are in order, and what’s more, they don’t have to sink a bunch of time and energy into doing that math in-house. 

You can invest in a DIY software solution that can get you halfway there, but to take this worry off your plate, you should partner with a high-quality, reliable payroll company like ConnectPay. 

Calculating Payroll Taxes

By following the steps outlined above, you should be able to calculate payroll taxes for your small business accurately. Be sure to keep track of any changes to FICA rates, state and local taxes, and federal withholding rates. These numbers may change with each tax year and should be reviewed regularly.

Trying to understand the nuances of payroll taxes can be stressful. Wouldn’t it be easier to partner with a team of payroll professionals who can take care of all your payroll needs? ConnectPay’s team of experts is always available to answer your questions during business hours. Schedule a call today to see how ConnectPay can simplify your payroll processes.