How to Calculate Payroll Tax Manually and Using Excel: Step by Step

Billpaywiki.comHow to calculate payroll tax? Whether you are a small business owner, employee, or employer for a big company, the government will ask you to pay taxes.

Payroll taxes can be described as taxes based on wages and tips earned by employees. These taxes are paid by workers and business owner. Workers pay it through their salary deduction, while owners pay the rest to the IRS.

Payroll taxes can be classified into several categories. The first one is federal income tax while the second one is FICA (Federal Insurance Contributions Act). Other taxes that will also cost workers are state income tax and local taxes.

To put it simply, these are the taxes that workers have to pay:

  1. Federal Income Tax
  2. FICA that goes to Social Security and Medicare
  3. Other taxes such as state tax

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How to Calculate Payroll Tax Threshold

The amount of tax that have to be paid is depending on employees’ salary and tips. FICA taxes are fix, there’s no maximum limit for Medicare, but there’s wage base limit for Social Security.

On the other hand, the federal income tax is progressive. In 2022, there are 7 marginal tax rates for different taxable incomes. Here’s tax rate table for single and married person.

For example, if you are a new employee with wage $7,000 you will be required to pay 10% of your salary for federal income tax.

How to Calculate Payroll Tax Withholding

Payroll tax withholding refers to the act by employers to withhold income tax on behalf of workers. To figure out the sum total of money that must be paid, first, you will need a Form W-4 published by IRS and the worker’s gross earning.

After that, you can choose to calculate the tax by 2 methods. The first method is the Wage Bracket Method. With this method, you have to fill a lot of questions provided by IRS. This method is often considered as easy and to the point.

The second method is the “Percentage Method.” This method is trickier and might be hard to understand by common people.

After you get the right amount of income tax that should be withhold from the employees, you’ll need to know the amount that they must pay, and the amount that is your responsibility.

For FICA, as an employer, you have to understand how to calculate pay roll tax regulated by IRS. In this case, you have the responsibility to pay your workers’ 50% tax. As the total percentage of FICA is 15.3% (12.4% for Social Security and 2.9% for Medicare), you should pay 7.65% from your own revenue. However, if your workers have salary exceed $147,700, they need to pay more for Medicare.

Example, your new employee gross earning is $6,000. The total tax that should be paid for Social Security is 12.4% x 6,000 = $744. Both owner and worker have to pay the half amount of it ($372).

How to Calculate Payroll Taxes Manually

Big companies usually calculate payroll taxes with advanced method. However, for some business owner, manual calculation is the best choice as it’s simpler and costly free.

Below are step by step how to calculate pay roll tax manually. You should calculate:

  1. Gross salary
  2. Federal withholding
  3. FICA
  4. Other additional taxes
  5. Deduction
  6. Net pay by deducting gross salary with all the taxes

What Is the Formula for Calculating Payroll?

Step 1: Calculate gross salary. For example, your employee annual salary is $48,000 and is paid 24 times a year. Meaning, his gross earning is: $48,000: 24 = $2,000

Step 2: Federal withholding calculation. This also has been explained above. Basically, you or your employee needs to fill the IRS’s W-4 Form including their marriage status and their number of allowances.

After that, here’s how to calculate pay roll tax using IRS table.

If your employee is married and doesn’t have allowance, his federal tax is $164.

Step 3: FICA taxes calculation.

FICA tax calculation is 6.2% for social security and 1.45% for Medicare.

6.2% x $2,000= $124

1.45% x$2,000= $29

FICA: $124 + $29= $153

Step 4: State and Local Taxes

State and local taxes are different across the US. If, for example, your worker lives in Texas, he doesn’t need to pay any taxes further.

Step 5: Payroll Deduction and Reimbursement

Additional deduction and reimbursement should be calculated for specific condition.

Step 6: Calculate Net Pay

How Do I Calculate Payroll in Excel?

Here’s how to calculate payroll tax using excel. It’s not difficult and actually more efficient. After launch the program, you just need to set column for each employee with their names and social security numbers. After that, you basically just need to use this excel formulation.

A B
1 Gross Pay =Total salary/pay times
2 Federal Withholding =-(based on IRS tax table)
3 Social Security =-(6.2% x B1)
4 Medicare =-(1.45% x B1)
5 State Tax =-(based on each state regulation, for Texas, it’s 0% x B1)
6 Net Pay =sum(B1:B5)

How to Calculate Payroll Tax Expense

Total payroll tax expense is the total amount of federal income tax, FICA, and state tax. For employee, if the gross earning is $2,000 like above scenario, the total taxes that have to be paid is: $164 +$124 + $29 = $317.

Employers need to withhold that taxes from employees’ salary. Furthermore, they also have to pay their employees’ half of FICA. Meaning, if their employee’s half of FICA is $124 + $29 or $159, they also have to pay $159 from their own money.

How to Calculate Payroll Taxes for Small Business

As stated above, it’s easier for small business owner to work out the payroll taxes manually or using excel. You just need to follow the sample case that has been explained previously. However, some business owners are actually self-employed. So how to calculate pay roll tax in that scenario?

If that’s the case, they definitely must pay all the taxes combined. The FICA tax that usually half paid by both workers and owners, have to be paid fully by themselves. So, if the gross earning is $5,000, they have to pay 15.3% x $5000 or $765.

Basically, calculating payroll tax can be difficult and tiring if we don’t understand the rules. For new employees, especially fresh graduates, this topic might cause confusion because there are different taxes that have to be paid. The same can happen with employers that have just started their small business.

Miscalculations can arise resulting in overpayment and underpayment. However, with clear understanding of IRS regulations and mastering how to calculate payroll tax, we can avoid problems. And all the explanations above can be your guide to do it.

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