How to Calculate Employer Payroll Taxes: A Guide

By: |Published on: Dec 4, 2024|Categories: Tax Planning|

It’s no secret how big a role payroll taxes play in running a business, no matter the size. The task might seem like a daunting process, but the key to conquering how to calculate employer payroll taxes is a little understanding. All you need is the right knowledge and tools, and calculating payroll taxes will be a breeze. 

That said, today, we’re diving into all of the components of payroll taxes, the payroll tax formula, and a quick step-by-step approach to help you better grip the process. 

 

What Are Employer Payroll Taxes?

 

When you’re trying to calculate employer payroll taxes, you’ve got to understand what all they include. Essentially, your employer payroll taxes are the payments your business makes to cover a multitude of government-mandated programs. These tax payments are separate from any amounts that are withheld from your employee’s paychecks and are paid directly by the employer. 

Here are the fundamental components that employer payroll taxes include:

  • Social Security Contributions: a portion of employee wages fund retirement and disability benefits. 
  • Medicare Contributions: This tax supports healthcare for anybody 65 and over.
  • Federal and State Unemployment Taxes: These are the contributions utilized to deliver unemployment benefits to those who’ve lost jobs. 

These are the main components that lay the foundation for using the payroll tax formula successfully. 

 

The Basics of the Payroll Tax Formula 

 

The payroll tax formula is a daily simple approach to calculating the total payroll taxes your business will owe. The formula looks like this:

(Gross Wages x Social Security Rate) + (Gross Wages x Medicare Rate) + (Gross Wages x Unemployment Tax Rate)

Here’s the breakdown:

  • Gross Wages: This is the total amount earned by your employees before the deductions.
  •  Tax Rates: This is the percentage that is applied for Social Security, Medicare, and unemployment taxes.

Essentially, you’d use this formula to make sure that all the contributions are accounted for, which makes it a lot easier to calculate employer payroll taxes properly.

 

Step-by-Step Guide to Calculate Employer Payroll Taxes

 

  • Determine Employee Gross Wages 

The gross wages include the total amount of money earned by the employees outside of deductions. This means:

  • Hourly wages or salaries
  • Overtime pay 
  • Bonuses or commissions

Example: If the employee earns $150,000 annually, their gross wages would be $150,000.

  • Apply Social Security and Medicare Rates 

Currently, the Social Security tax rate is 6.2%, while the Medicare tax rate is 1.45%. That said, employers are required to match these contributions to stay in compliance. Let’s break it down:

  • Social Security

$150,000 x 6.2% = $9,300

  • Medicare

$150,000 x 1.45% =$2,175

  • Total Employer Contribution:

$9,300 + $2,175 = $11,475

  • Calculate Federal and State Unemployment Taxes

Federal Unemployment Tax (FUTA) is usually 6% on the first $7,000 of your employees’ wages, although a lot of employers qualify for a credit that would lessen that effective rate to 0.6%

  • FUTA 

$7,000 x 0.6% = $42

State unemployment, on the other hand, has tax rates that tend to vary by location. If you’re in a state where the unemployment rate is 2% and it applies to the first $10,000 of your wages, here’s what it would look like. 

  • SUTA

$10,000 x 2% = $200

  • Total Unemployment Tax 

FUTA ($42) + SUTA ($200) = $242

  • Add It All Together

Utilizing the payroll tax formula, the employer payroll taxes for this employee would go as follows:

    • Social Security: $9,300
    • Medicare: $2,175
    • FUTA + SUTA: $242
  • Total Employer Payroll Taxes: $12,257

If you want to be sure that all of the required taxes are accounted for properly, the payroll tax formula is the way to go. 

 

How Estess CPAs Can Help

 

If calculating your payroll taxes seems overwhelming, you can count on the Estess CPA team to lighten the load. We specialize in helping small businesses calculate employer payroll taxes accurately and efficiently, among other things. We have a team that is equipped to keep all of your payroll systems up to date when it comes to being in compliance with the latest rates and regulations. 

Are you ready to start focusing on what matters most? Click here to get in touch with the Estess CPA team. We’ll work with you closely to understand all of your business’s financial requirements and goals and help streamline all of your payroll processes as a result. 

Focus on your usual business operations. Let us handle the numbers.