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 example, a single worker in New York City, earning $25,000 would be charged $856 in addition to other mandatory taxes.
For 2014, the maximum taxable earnings amount for Social Security (OASDI) taxes is $117,000. There is no limitation on taxable earnings for Medicare's Hospital Insurance (HI) taxes.
- The Social Security tax rate for employees is 4.2 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 Social Security tax rate for self-employed is 10.4 percent through the end of the year. The Medicare tax rate is 2.9 percent for self-employed.
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.
For 2013, the employee tax rate for social security increases to 6.2%. The social security wage base limit increases to $113,700.
According to the IRS, employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013.
Additional Medicare Tax Medicare surtax of 0.9% on wages and self-employment income begins 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.
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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.