Tips on how to Calculate Payroll | Taxes, Strategies, Examples, & Extra

When you’ve got workers, payroll is one in every of your most vital duties. As a result of payroll is oh-so-important, it’s essential to know how one can calculate payroll. That features understanding how one can calculate taxes and different deductions precisely. Learn on to be taught extra about how one can calculate payroll by hand.

Tips on how to calculate payroll taxes: The fundamentals

Earlier than calculating payroll, it’s essential to know the way a lot and the way typically you pay your workers. 

For hourly workers, multiply the overall hourly fee by the variety of hours labored for the pay interval. If the worker works additional time and is nonexempt, multiply the hourly fee by 1.5 (or the speed in line with the additional time guidelines by state) to get the additional time fee. Then, multiply the additional time fee by the variety of hours the worker labored over 40 within the week. Add the worker’s complete common wages and additional time collectively (if relevant).

In case your worker is salaried, decide their annual wages and divide it by the variety of pay intervals within the 12 months (e.g., 26 pay intervals for biweekly). The quantity is the worker’s gross wages for the pay interval. For instance, if an worker makes $40,000 yearly and is paid biweekly, divide their annual wages ($40,000) by 26 to get their complete gross pay for the interval ($40,000 / 26 = $1,538.46).

Usually, there are a couple of taxes it’s essential to calculate to course of payroll appropriately, together with:

In some states (e.g., Pennsylvania), you could must calculate state unemployment taxes in your workers. Moreover, some states have state-specific taxes workers and/or employers could must pay (e.g., Oregon transit tax).

Federal earnings tax

The IRS releases a brand new Publication 15-T every year with directions on how one can calculate federal earnings tax. Tips on how to calculate federal earnings tax is dependent upon a wide range of components, together with:

  • Which model of Type W-4 you’ve got on file for the worker (pre-2020 or post-2020)
  • Pay frequency
  • Worker’s submitting standing (e.g., single)
  • If the worker has a number of jobs (i.e., the worker checked the field in Step 2 for a number of jobs)
  • Dependents quantity (or withholding allowances, if utilizing the pre-2020 Type W-4)
  • Deductions
  • Further withholdings

As soon as you realize your worker’s data, you should utilize Publication 15-T to find out how a lot to withhold for FIT. 

Decide which calculation methodology to make use of earlier than you begin. The IRS gives two strategies: proportion and wage bracket. Publication 15-T provides each the proportion methodology and wage bracket methodology worksheets. Use the relevant worksheet to calculate every worker’s federal earnings tax withholding. 

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Social Safety tax

Social Safety tax is a payroll tax that each employers and workers contribute to equally. The whole tax quantity is 12.4%. The worker pays half (6.2%), and the employer pays the opposite half (6.2%). Cease withholding and contributing Social Safety tax after the worker earns above the Social Safety wage base

Multiply 6.2% by the worker’s gross taxable wages for the pay interval to search out their Social Safety tax quantity. 

Medicare tax

Medicare is the opposite tax that each employers and workers contribute to. The whole tax is 2.9%, so workers pay 1.45%, and employers pay 1.45%. 

Multiply the worker’s gross taxable wages by 1.45% to find out how a lot to withhold for Medicare tax. Medicare doesn’t have a wage base. Nonetheless, it’s essential to withhold a further 0.9% from worker wages in the event that they earn above $200,000. Employers don’t have to contribute to the extra Medicare tax quantity, however they need to proceed to contribute 1.45% every paycheck. 

State earnings tax

Some states don’t have earnings tax, together with:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas 
  • Washington
  • Wyoming

In case your worker works in a state with out earnings tax, don’t withhold state earnings taxes from their wages. 

Some states have a flat tax fee, which means that the speed doesn’t change relying on how a lot an worker earns. These states embody Arizona, Colorado, and Utah.

Some states have a progressive tax fee, which means that the speed will increase the extra an worker earns. These states embody Arkansas, Hawaii, and Maine.

In case your state has a flat tax fee, multiply the tax fee by the gross taxable wages to find out the quantity of tax to withhold out of your workers’ checks. 

In case your state makes use of a progressive tax fee, use the tax tables in your state’s earnings tax withholding documentation to find out how a lot SIT to withhold out of your workers. 

Examine along with your state for extra data on their tax charges.

Native earnings tax

Not all states have native earnings tax, even when the state has state earnings tax. Examine along with your native authorities to find out in case your workers should pay native earnings tax. 

Charges can fluctuate from locality to locality. In case your workers should pay native earnings tax, use the documentation from the native authorities to find out how a lot native earnings tax to withhold. 

Different deductions to think about when calculating payroll

Typically, calculating payroll is as straightforward as solely figuring out the quantity of taxes to withhold. Different instances, you’ve got worker deductions to calculate, too. There are two kinds of tax deductions to think about when calculating payroll:

Pre-tax deductions

Pre-tax deductions are what they sound like: the deduction comes out of an worker’s wages earlier than you calculate the taxes. A pre-tax deduction is tax-free and reduces the taxable earnings for an worker’s federal, state, and native taxes, together with:

  • Federal earnings taxes
  • FICA (Social Safety and Medicare taxes)
  • State earnings taxes, if relevant
  • Native earnings taxes, if relevant

Sadly, not all pre-tax deductions are so easy. For instance, a 401(okay) is a pre-tax deduction for federal earnings taxes however not for Social Safety and Medicare taxes. So, you’d solely subtract the price of the deduction from the worker’s gross wages to calculate FIT. To calculate Social Safety and Medicare taxes, you wouldn’t subtract the quantity of the deduction. 

Put up-tax deductions

Put up-tax deductions are a bit easier to calculate. Subtract the deduction from the wages after you calculate and deduct the entire payroll taxes. 

Payroll how-to instance

Your worker, Bob, earns a biweekly wage of $3,000. He makes use of the new Type W-4 and is single with no dependents or deductions. He didn’t test the field for a number of jobs. And he doesn’t have further withholdings, different tax deductions, or pre- or post-tax deductions. Bob lives and works in Texas, so he doesn’t have state or native earnings taxes. 

Utilizing Publication 15-T, you determine to make use of the proportion methodology to calculate Bob’s federal earnings tax withholding. Full Worksheet 4 for the proportion methodology tables. You do payroll manually, so you could use the proportion methodology tables for handbook payroll programs with Varieties W-4 from 2020 or later.

Copy of a completed Worksheet 4 from Publication 15-T for 2024 for an example worker.

Right here is Bob’s data utilizing Worksheet 4 for Share Methodology Tables for Handbook Payroll Methods With Varieties W-4 From 2020 or Later:

  1. $3,000 per payroll interval
  2. 26 pay intervals within the years (biweekly)

Bob makes use of the 2024 Type W-4. Full the part for this model of the shape:

  1. Enter “0” on line 1c as a result of Bob doesn’t declare different earnings (not from jobs).
  2. Enter “0” on line 1f as a result of Bob doesn’t declare different deductions. 
  3. Bob didn’t test the field for a number of jobs and is submitting as single.
  4. Bob’s Adjusted Wage Quantity is $3,000, the identical as his complete taxable wages per payroll interval.

It’s essential to now calculate the tentative withholding quantity for Bob’s wages. Use the proportion methodology tables for biweekly payroll. The left aspect of the desk applies to workers who didn’t test the field on Step 2 of Type W-4. 

Percentage method for manual payroll systems with Forms W-4 from 2020 or later on Publication 15-T with the single or married, filing separately status highlighted.

To calculate Bob’s FIT, use the world outlined in pink. Use the part for Single or Married Submitting Individually to find out the tentative withholding quantities:

  1. Bob’s biweekly pay is $3,000, which is bigger than $2,375 and fewer than $4,428. Enter $2,375 on line 2a.
  2. Column C is $208.64. Enter this quantity on line 2b of Worksheet 4.
  3. Column D’s proportion is 22%. Enter 22% on line 2c.
  4. Subtract $2,375 from $3,000 to get $625. Enter $625 on line 2nd.
  5. Multiply $625 by 22% to get $137.50. Enter this quantity on line 2e.
  6. Add collectively $208.64 and $137.50 to get $346.14. Enter $346.14 on line 2f.

Then, account for the tax credit listed on Bob’s Type W-4. Bob doesn’t have any dependents, so enter a 0 on traces 3a and 3b on Worksheet 4.

Bob additionally doesn’t record further withholdings on his W-4 kind. Enter a 0 on line 4a.

The whole quantity of FIT to withhold from every of Bob’s paychecks stays $346.14.

Calculating different taxes and internet earnings

Calculating Social Safety and Medicare tax is far easier than calculating FIT. Merely multiply $3,000 by 6.2% to find out how a lot Social Safety tax to withhold ($3,000 X 6.2% = $186). Withhold $186 from every of Bob’s paychecks (until he hits the SS wage base). 

Multiply $3,000 by 1.45% to find out how a lot Medicare tax to withhold ($3,000 X 1.45% = $43.50). 

As a result of Bob doesn’t have state or native earnings taxes, now you can subtract the tax withholdings from the gross earnings to find out Bob’s internet earnings (aka take-home pay):

Gross Pay – FIT – SS Tax – Medicare Tax = Web Earnings

$3,000 – $346.14 – $186 – $43.50 = $2,424.36

Bob’s internet earnings is $2,424.36. 

Double-check your work

Earlier than you rush off to begin writing paychecks, test and double-check your work. You should utilize totally different calculators to verify your math is true. Typically known as a paycheck calculator, paycheck tax calculator, payroll calculator, or payroll tax calculator, these instruments can help you in checking your work. 

Or, make it straightforward through the use of payroll software program that has the tax charges and your worker’s Type W-4 data entered. Payroll software program does the entire calculations for you, together with FIT, SIT, Social Safety, and Medicare taxes. And, most software program additionally calculates further state payroll taxes. 

This text has been up to date from its authentic publication date of January 3, 2022.

This isn’t supposed as authorized recommendation; for extra data, please click on right here.


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