How to Determine Payroll Taxes

As an employer, navigating payroll taxes can pose a challenge. Not only does an employer have to withhold the business’ portion of payroll taxes, it also must set aside the employee’s portion of those taxes. Add in state income taxes, unemployment, Social Security and Medicare, and some employers get completely overwhelmed. Figuring out how to determine payroll taxes is actually quite straightforward. The key is knowing where to look to find the right amounts to withhold.


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    Calculate federal withholding.
    • The IRS publishes tax tables every year that tell employers how to calculate federal withholding. Publication 15-T, available as a PDF download from the IRS web site, tells employers exactly how much federal income tax to withhold from an employee’s paycheck, as well as how much the employer must contribute.
  2. Image titled Determine Payroll Taxes Step 2
    Determine FICA.
    • FICA, or the Federal Insurance Contributions Act, includes Social Security and Medicare taxes.
    • In 2009, FICA rates were 6.2% and 1.45% for Social Security and Medicare, respectively.
    • Employers and employees only pay Social Security taxes on the first $106,800 of earnings every year.
    • Medicare taxes have no earning limits.
  3. Image titled Determine Payroll Taxes Step 3
    Figure out how much state income tax should get withheld and paid.
    • While some states, like Florida, currently don’t have a state income tax, most states require that employees and employers pay a state income tax. Any employer who needs to calculate a state income tax should get the current tax rates from the state’s Department of Revenue. Failure to keep up-to-date and compliant with legislation will cost a business money in punitive charges.
  4. Image titled Determine How Much House You Can Afford Step 3
    Withhold unemployment taxes (also called FUTA).
    • FUTA, or the Federal Unemployment Tax Act, pays unemployment benefits to employees who are fired or laid off when they could still perform their job. Every employer must pay FUTA on every employee.
    • Employers must pay 6.2% of every employee’s first $7,000 of taxable wages each year. This rate will vary if an employer has had unemployment claims in the past.


  • Consider hiring a payroll company that will calculate taxes on behalf of the company. These companies often charge a small fee for their services, but, in return, they handle taxes, payroll and insurance issues.
  • Software programs like QuickBooks Pro and Peachtree Accounting can help take some of the drudgery out of calculating payroll taxes.
  • New businesses should invest in a few hours with an accountant familiar with payroll taxes. A skilled accountant can help set up a system that works to budget for, calculate and file payroll taxes. He can also help a business find ways to save money and use the tax law to its advantage.


  • Resist the urge to file less than quarterly. Remember that the money a business pays for payroll taxes will include not only the employer’s portion but the amount it withheld from the employee as well.
  • It may seem like a cost-saving move to make many or all employees independent contractors, but the IRS has wildly specific rules for what circumstances must exist for an independent contractor situation to apply. If the IRS audits a business and determines that the employees should not function as independent contractors, the business will have to pay all back taxes as well as penalties and late fees.

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Categories: Taxes and Fees