Having a keen understanding of how to compute payroll taxes will pose an essential task to any business of any size. There are a lot of moving parts involved, so we can understand how it can be a little intimidating to complete. With the percentages, wage bases, and other tax components, it can be hard to keep up.
That’s why today, we’re doing a comprehensive payroll tax breakdown that will help you ensure everybody in your organization is paid accurately and in a timely fashion.
Let’s get started!
What Are Payroll Taxes?
Before we jump into how to compute payroll taxes, you first need to have a keen understanding of what all payroll taxes include. Your payroll taxes are the contributions that your company will make based on employee wages. These contributions help to fund social security programs and other state initiatives. Usually, you can count on this including:
- Social Security contributions (a percentage of employee wages)
- Medicare contributions (a fixed percentage of employee earnings)
- State Unemployment taxes (rates will vary by state)
Now, let’s get to know how computing your payroll taxes works!
Breaking Down the Payroll Tax Formula
If you truly want to learn how to compute payroll taxes, make sure you start with a simple formula. There will be specific elements that vary, but the fundamental approach is as follows:
- Determine Gross Wages: Employee’s total pay before any deductions are made.
- Apply Tax Rates: Make sure to use the appropriate percentages when it comes to calculating Social Security, Medicare, and state unemployment taxes.
- Add Them All Up!: This step is pretty simple. Add aloof your findings together for the final employer payroll tax total.
When you follow this quick and easy formula, you have a transparent view of what you owe will be.
Step-by-Step Guide on How to Compute Payroll Taxes
Here are a few steps to make your payroll tax computing a little simpler:
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Determine Employee Gross Wages
If you weren’t already aware, your employees’ gross wages are the amount that they’ve earned before you take out deductions. This would include:
- Hourly wages or salary
- Overtime pay
- Bonuses and commissions
Let’s say your employee earns $75,000 per year. That means their gross wages would total $75,000.
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Identify the Applicable Tax Rates
Next, it’s time to find the current rates for Social Security, Medicare, and state unemployment taxes.
- Social Security: The set percentage of employee wages up to a certain limit
- Medicare: The fixed percentage of all the employee’s wages
- State Unemployment: Since the rates vary by state, make sure to check with your state’s guidelines to stay in compliance.
Let’s move on to applying the payroll tax formula.
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Apply the Rates Using the Payroll Tax Formula
Next up, is the payroll tax formula. Here is how to calculate each aspect:
- Social Security = Gross Wages x Social Security Rate
- Medicare = Gross Wages x Medicare Rate
- State Unemployment = (Applicable Wages) x (State Unemployment Rate)
Now that the hard part is over, now for the finale!
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Calculate the Total Employer Payroll Taxes
This part is the most straightforward. Now is the time to add up all of the amounts for Social Security, Medicare, and state unemployment taxes together:
- Total Employer Payroll Taxes = Social Security + Medicare + State Unemployment
Once you have all of them totaled, you can count yourself as having learned how to compute payroll taxes, since you now have a clear payroll tax breakdown.
A Few Common Mistakes to Avoid
If learning how to compute payroll taxes is new to you, you’re probably coming across a few challenges. Here are a few of the most common and how you can mitigate them:
- Using Outdated Tax Rates: In order to stay compliant, it’s important to stay up to date. Tax rates and thresholds have a way of changing over time. If you are diligent about staying informed, you’ll be able to update your calculations regularly.
- Misclassifying Employees: Are you properly distinguishing between your employees and independent contractors? If not you could be affecting your tax calculations. Make sure that you are accurately identifying them to stay in compliance.
- Forgetting State Requirements: Each state has unique payroll tax rules. That said, make sure that you know your state’s rules and regulations so that you can incorporate them into your calculations. If you want to have an accurate payroll tax breakdown, stay compliant!
If you’re aware of these issues beforehand, you can better navigate your calculations. It’s not as hard as you think!
Why Understanding Payroll Taxes Matters
More than meeting obligations, the power behind knowing how to compute payroll taxes accurately lies in the effective budgeting and positive employee relations that you’re maintaining. If you are diligent in mastering the payroll tax breakdown, you have the ability to mitigate penalty risk and reduce time and manpower so you can properly plan ahead.
How Estess CPAs Can Help
We know that comprehending how to compute payroll taxes is a valuable skill to have in your toolbelt, but it can also be a time-consuming task. That said, the Estess CPA team can help! Our team specializes in delivering tailored services to small businesses all across New Orleans.
If you’re looking to streamline your payroll operations, partner with Estess CPAs! We’ll have you on the right financial track in no time. Click here to speak with the team. We’ll streamline all of your financial operations, while you focus on running your business.
Let us handle the numbers.
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