Calculating payroll tax is neither difficult nor easy; all you need to do is to follow the guided steps. Like you, many small business owners followed the steps in this post and learned to calculate payroll taxes. Of course! Small business owners like you have fires to put out to credit salaries promptly. You need not worry because once you figure out the requirements of the filings and learn the required maths, it makes the process easy. It is crucial to calculate payroll taxes as it is critical to both employees and accountants. After thorough research, we have written this post considering every essential factor for a small business owner.
This post will assist you on how to calculate payroll taxes for employees. We offer Personal Tax Services if you require more professional and expert services on payroll taxes.
What are Payroll Taxes?
Payroll taxes are the amount you pay as an employer to different tax authorities for wages paid to your employees. The tax comprises wages and gross salaries paid to the employees and other perks and remuneration. However, payroll taxes include more than these two costs.
Even though the rate has been constant since 1992, rates have increased with time. The federal payroll tax rates for the current year, 2023, are as follows:
- Social Security Tax Rate: Employer and employee pay 6.2% of the total.
- Medicare Tax Rate: A total of 1.45% for the employer and 1.45% for the employee.
- Additional Medicare: 0.9 percent of the employee’s annual salary that exceeds $200,000.
- FUTA tax rate: On the first $7,000 paid to the employee, the business will receive 6%.
How to Calculate Payroll Taxes as an Employer?
When you successfully set up your business and employees, now is the time to figure out the wages of the employees and the amount of taxes withheld. This also includes deductions from health insurance, retirement benefits, and crediting reimbursements. Technically, it is called gross pay to net pay. Since we have entered 2023 and tax slabs have been updated, let us learn how to calculate payroll taxes for 2023.
Calculating Gross Pay for Hourly Employees
Let us first understand what gross pay is, and along with this, you will learn how to calculate payroll taxes for employees working on an hourly basis. In simple words, gross pay is the total amount an employee earns before submitting any taxes. To calculate an employee’s gross income, multiply the hours worked by the amount employee earns in an hour.
Overtime
If you offer overtime to your employees, add overtime pay too. As per federal laws, this is usually 1.5 times the basic pay rate. Once your employee(s) crossed the weekly hours, that is 40 hours, at 41st, and so on. They would be getting a salary based on $35/hour.
- 40 regular hours multiplied by $20 per hour (regular pay) = A total of $800
- 10 overtime hours multiplied by $30 per hour (regular pay x 1.5) = a Total of $300
- $800 (regular pay) + $300 (overtime pay to the employee) = Total $1,100 gross pay for the pay period
Calculating Gross Pay for Salaried Employee
For salaried employees, divide the total annual salary by the number of pay periods that occurred within the fiscal year. There would be 52 pay periods in a year if a company paid its employees once every week.
Formula: Salary per annum/number of pay periods = gross pay per pay period.
- For instance, an employee makes $41,600 annually at a business with 52 pay periods.
- Annual salary divided by the number of pay periods = gross pay per pay period.
- $41,600 / 52 = $800 gross income per pay period.
Overtime
Add any other reimbursements the employee received, including overtime pay. Lower-paid workers are occasionally permitted to work overtime. Employers must pay employees overtime if they work more than their usual hours if their yearly wage is less than the minimum set by the Department of Labour. Let’s understand this with an example.
Leena is a web developer for a significant business. Leena receives her compensation of $40,000 twice a month or 24 times a year. In addition to this, she also gets a bonus each year which is $5000. This makes Leena’s total annual gross income $45,000.
The following formula would determine Leena’s gross pay if her bonus were paid at the end of the year in her last paycheck of the year:
- $40,000 annual salary divided by 24 pay periods = a Total of $ 1,667 regular pay period.
- $5,000 bonus divided by one pay period = a Total $5,000 bonus in the one last pay period.
- $1,667 regular pay when added to the $5,000 bonus = Total of $6,667 gross pay for the previous pay period.
Calculate Employee Tax Withholdings
Use the employee’s gross salary to calculate the income taxes that should be withheld from their paychecks on their W-4 form. It may be necessary to withhold federal and state taxes in some states.
What are Gross Taxable Wages?
Gross wage indicates an employee’s monthly or yearly salary before any deductions. Gross salary comprises basic salary, provident fund, house rent allowance, medical allowance, leave travel allowance, professional tax, etc.
Taxable wages are the sum of an employee’s earnings subject to taxation. It makes no difference if we discuss a non-exempt or exempt employee. The catch is that not every money received is subject to taxation. The W-2 form features a separate area for reporting taxable wages.
How to Calculate Taxable Wages?
Payroll taxes are a concern for all businesses with employees. Before issuing paychecks, it is the employer’s responsibility to understand how payroll operates and to withhold the taxes necessary. However, the federal tax laws of the United States are anything but simple, as everyone who has filed taxes is aware.
Here is a manual to assist individuals managing payroll in understanding the idea of federally taxable wages. This is crucial to recognizing the different types of taxable income and reporting an employee’s taxable earnings on form W-2, which might affect your company’s qualified business income deduction (QBI).
Let us go step-by-step through the procedure, as FIT taxable salaries might be challenging.
1. Gross Wages
Gross wages are the first factor that assists IRS calculates an individual’s tax liability. When calculating an employee’s gross pay, sum up their compensation, including salary, overtime, and any reimbursements for tuition and business costs. Even if certain sums are subtracted in the following phase, this amount must be reported to the IRS.
Gross wages are the first factor that helps IRS calculate the individual’s tax liability.
2. Non-taxable Wages
The IRS designates some employer payments as non-taxable income. These are subtracted from the gross wages to determine the amount of taxable earnings. Examples include compensation for travel expenses, some business expenditure reimbursements, and financial aid for schooling. A lot of them also have a limit on how much is exempt from taxes.
3. Deductions
Pre-tax deductions should now be taken out of the gross pay. Subtract the employee’s pre-tax payments to qualifying retirement plans, flexible spending accounts (FSA), small company health insurance, and similar programs.
We have now reached the stage where many employees’ taxable earnings are due. However, go to the next step if an employer provides additional taxable benefits.
4. Employer-provided Fringe Benefits
Additionally, some firms offer taxable perks included in the employee’s income. The amount of the relocation expense payments, for instance, would be added to the taxable salaries to determine the final tax amount.
5. Taxable Wages Total
The sum used to determine tax liabilities is the employee’s taxable wages, adjusted for all additions and deductions from gross pay. The filing status of an employee (single or married) and the number of allowances they get, both specified on their W-4, affect the actual amount of tax withheld from their paycheck.
Use this formula for calculating taxable wages:
(Gross wages) – (Non-taxable wages) – (Pre-tax deductions) + (Taxable benefits) = Taxable wages
Various Components of Gross Salary
Here are the various components which accommodate the gross salary.
- Basic salary, pension contribution, bonus contribution, compensation arrears, fee or remuneration, payment for overtime, and performance-based financial awards.
- Allowances such as housing allowance, medical allowance, leave travel allowance, dearness allowance, and other similar allowances.
- Charges for amenities such as housing rent, electricity, water, and fuel
- A pension from a previous employer.
Gross Salary does not Include Certain Components
The following are the few things that do not form part of the gross salary paid by an employer to an employee.
- Compensation for medical costs.
- Travel leave concession.
- When an employee retires, leave encashment is implemented.
- The company offers employees free meals, snacks, or beverages during business hours.
- Gratuity.
Do Not Skip this Step
Your work is not finished just because you calculated the payroll and paid your personnel. Additionally, you must submit the taxes you withheld to the appropriate taxation authorities (FIT, FICA, state and local income taxes, etc.). That is the IRS for FIT and FICA. That is the withholding tax authority for your state and local income taxes.
Ensure to include the taxes you withheld from your employee’s paycheck and the taxes you are liable for paying as the employer.
The amount, frequency, and length of your lookback period — a historical examination of your payroll and previous payments — determine when you send your federal taxes. Information on how, when, and where to pay FIT and FICA may be found on IRS Form 941, Employer’s Quarterly Federal Tax Return.
The final day of the month after the conclusion of a calendar quarter is when Form 941 must be submitted. For instance, Form 941 is due on April 30th for the quarter that ends on March 31st. Do not forget to fill out this form — there are serious fines for doing otherwise!
For information on filing requirements for state and local income and Business Tax Rates, you can get in touch with the local tax authority, and here we want to clarify that these tax authorities are different for each state in the United States.
Hopefully, this post has helped you know how to calculate payroll taxes. With this post, we have tried to give you a straightforward explanation of the payroll taxes concept. If you are looking for further assistance from payroll experts, you can contact the Toll-Free Number 1800-580-5375.