How to Calculate Employee Payroll Checks
It is the responsibility of the employer to accurately calculate payroll for their employees. Errors can result in employees having too much or too little of their pay withheld for taxes, Social Security, Medicare and other deductions, which causes an inconvenience for your employees at tax time. Errors can potentially lead to audits by goverment agencies, such as the Internal Revenue. You may want to consider using Payroll For America's payroll service and spend your time on more revenue generating.
Things you'll need:
- W-4 Forms
- Circular E from IRS
- State/Local withholding charts
- Written authorization for voluntary Deductions/reductions
Calculating Payroll Checks
Have your employees fill out a W-4 Form. This is required by law and it must include their correct and verifiable name, address and social security number. They also need to indicate their marital status and their selected personal exemptions. The form must be dated and signed by the employee and kept on file by the employer.
Calculate your employee's gross wages. If your hire is a salaried employee, use his weekly salary as his gross pay and begin the deductions from that point. If he is paid hourly, multiply the hours worked by his hourly wage. The resulting sum is his gross pay.
Deduct voluntary payroll reductions. These amounts are subtracted from and reduce gross pay, thus rendering them non-taxable. Federal Income Tax is based on gross pay amount after these reductions are taken. Among allowable non-taxable reductions are contributions to retirement accounts. Any of these reduced amounts must have written authorization from the employee.
Deduct statutory payroll taxes from gross wages. These taxes include: Federal income tax. This amount can be obtained from the IRS Publication 15 (Circular E) tax tables and is based on an employee's filing status and number of claimed deductions. State Income Tax. This percentage rate will vary from state to state. Some states have no income tax; some tax only on certain kinds of income. Local Income Tax. Again, whether or not your employee is subject to this tax is determined by geographical location.
For 2016, the employee tax rate for social security remains at 6.2%. The social security wage base limit remains the same as of 2015 at $118,500. The limit in 2014 was $117,000. The medicare tax remains the same in 2015 - 1.45% no limits.
Additional Medicare Tax
For highly compensated employees, Medicare takes a larger bite under a provision of the Affordable Care Act that makes the employee-paid portion of the Medicare FICA tax subject to a 0.9 percent Additional Medicare Tax on amounts over a statutory threshold. The threshold annual compensation amounts that trigger the Additional Medicare Tax are:
- $250,000 for married taxpayers who file jointly.
- $125,000 for married taxpayers who file separately.
- $200,000 for single and all other taxpayers.
Note: Additional Medicare Tax withholding applies only to employee compensation in excess of these thresholds in a calendar year. These thresholds are not inflation-adjusted, and thus they apply to more employees each year.
This added tax raises the wage earner's portion on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent.
- The Social Security tax rate for employees is 6.2 percent through the end of the year
- The Social Security tax rate for employers is 6.2 percent
- The Medicare tax rate is 1.45 percent for employees and employers - no limits
- The self-employed person's FICA tax rate for the year 2016 (same as 2015) consists of the Social Security tax of 12.4% (6.2% + 6.2%) of the first $118,500 of net income plus the Medicare tax of 2.9% (1.45% + 1.45%) of every dollar of net income. This means that in 2015 a self-employed person's net income that does not exceed $118,500 will have a FICA tax of 15.3% (the 12.4% of Social Security tax plus the 2.9% of Medicare tax).
Deduct voluntary deductions. These deductions reduce net pay, but do not reduce gross pay and may include contributions to savings plans, tuition payments, direct deposits. Again, it is necessary to have written authorization from the employee to make these deductions from his paycheck.
Subtract all of the previous amounts to arrive at net pay.
The IRS has posted responses to frequently asked questions regarding the Additional Medicare Tax.
Net Investment Income Tax
Although it is not a payroll tax, HR professionals also should be aware of the net investment income tax (NIIT) that high earners must pay when they file their income tax returns. This tax consists of a 3.8 percent surtax on investment income, including capital gains, to be paid by those with modified adjusted gross income above $200,000 (single filers) or $250,000 (joint filers).
Individuals that expect to be subject to the tax should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.
FUTA Credit Reduction States
While the standard Federal Unemployment Tax Act (FUTA) rate is 6 percent on the first $7,000 of covered wages, employers generally receive a FUTA credit reduction of 5.4 percent for state unemployment insurance (UI) taxes they pay, reducing the FUTA rate for most employers to 0.6 percent of wages paid up to a limit of $7,000 per worker, or $42 per employee per year. However, states that have outstanding federal UI loan balances are subject to reduced tax credits, resulting in higher FUTA taxes for employers in those states.
The Department of Labor announced that employers will be subject to an increased FUTA tax rate in January 2015 based on FUTA taxable wages paid during 2014 for California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio and the Virgin Islands.
The FUTA tax liability for 2014 is not due or reportable until Jan. 31, 2015, the filing date for the 2014 Form 940.
Additional Medicare Tax Medicare surtax of 0.9% on wages and self-employment income began in 2013.
Employees and self-employed persons are required to pay an additional 0.9% surtax on the amount Medicare wages and net self-employment income that passes the threshold amount based on a person's filing status. Medicare wages are an employee's total wages for the year, less any benefit deductions that offset Medicare wages themselves (such as medical and dental insurance and contributions to a dependent care flexible spending arrangement).The additional Medicare tax is a tax imposed on the employee only. There is no employer contribution, unlike the regular Medicare tax. Medicare wages are reported on Form W-2 box 5.
Try our Payroll Calculators - It's Free!
Please note: Our explanation that are provided on our web site for "How to Calculate Employee Payroll Checks" are only meant to provide general guidance and estimates about the payroll process. They should not be relied upon to calculate exact taxes, payroll or other financial data. You should consult with a professional advisor or accountant regarding your specific payroll concerns.