3 Tips to Help Small Business Owners Calculate Payroll Taxes

March 25, 2015

Its time to bring out that tax calculator. It may not be fun, but calculating taxes and withholding for employees is a critical task for all small business owners. Both withholdings and taxes are dependent upon several factors  including (but not limited to) marital status, and allowances. For employers, underpaid tax liabilities can equate to fines, late payment penalties and accompanying interest. And for employees, a hefty bill could surface at tax time when they’re not prepared to cover it. If you are looking for help, payroll software providers like SurePayroll offer several tax calculators on their websites to help you get started.” Whether you plan to pursue help or go it alone, you should review our detailed breakdown of top tips to consider when it comes to each component of payroll taxes and withholdings.

  1. Federal and State Income Tax

Each time a new employee comes on board, have him or her complete a Form W-4. The inputs, including marital status and allowances, determine the amount of federal income taxes to be withheld from the employee’s wages each pay period. If your employee is unsure of how many allowances to claim or needs additional assistance completing the form, refer him or her to the  federal withholding calculator on the IRS website. Assuming your employees are also subject to state taxation, additional information about income tax withholding can be retrieved from your state's Department of Revenue. Key tip: In the event you are unsuccessful at retrieving a completed Form W-4, the IRS recommends classifying the employee as single with zero allowances when computing the amount to withhold.

  1. Social Security and Medicare Withholding

The Federal Insurance Contributions Act (FICA) is responsible for the implementation of Social Security and Medicare taxes. Here’s how to calculate these important withholdings:

  • Social Security withholding. Both the employer and employee must contribute 6.2 percent or 12.4 percent total. Earnings of up to $118,500 are subject to social security withholding. Any amounts over this threshold are exempt.
  • Medicare withholding. Both the employer and employee must contribute 1.4 percent. All earnings are subject to taxation.
  • Additional Medicare tax. If the employee is paid more than $200,000 in wages, any payments over this amount are subject to additional Medicare tax withholding of 0.9 percent.
  1. Federal and State Unemployment Tax

The Federal Unemployment Tax Act, also known as FUTA, mandates withholding of 6 percent. However, employers may also be eligible for a credit up to 5.4 percent, which would subsequently decrease withholding to 0.6 percent. FUTA withholding only applies to the first $7,000 in employee wages. It’s important to note that employees who generate earnings in Alaska, New Jersey and Pennsylvania must also remit payment for federal unemployment taxes. Key tip: To learn more about FUTA and how it should be computed, take a look at the 2014 Instructions for IRS Form 940. In addition to the federal unemployment tax, employers are also responsible for State Unemployment Insurance (SUI). With the proper resources on hand and knowledge of the tax code as it relates to your responsibilities, you can ensure withholdings for payroll taxes are calculated properly. Luckily, there’s technology that can make this easier for you. Consider using a software to streamline this process of even consult a small business accountant. It just might be worth it.