As an employer, one of the most important responsibilities is maintaining compliance with relevant tax laws, including those surrounding payroll taxes. Making accurate payroll tax calculations can help your business avoid penalties and fees that can impact your bottom line and reputation. There are several payroll taxes to be aware of, such as FICA and unemployment taxes, that must be accurately calculated, deducted, and remitted to the appropriate tax authorities. In this guide, we explore how to calculate payroll taxes, tips for understanding payroll tax deductions, and more, so you can have peace of mind knowing you can calculate employer payroll taxes accurately.

A guide to payroll tax compliance

Ensure Payroll Tax Compliance for Accurate Calculations

An accurate payroll tax calculation is essential for any employer, as it ensures you remain compliant with federal, state, and local tax laws. To ensure payroll tax compliance for accurate calculations, it’s essential to understand which payroll taxes you may be responsible for. It’s also important to understand the necessary due dates, as payroll taxes are required to be paid by specific deadlines during the calendar year to avoid penalties and fines. Below, you’ll find information on how to calculate payroll taxes, such as FICA, FUTA, and state and federal income taxes.

Identify Payroll Taxes

Payroll taxes is an umbrella term that consists of a number of taxes that are collected by federal, state, and local governments. But which taxes are payroll taxes? Common payroll taxes employers are responsible for include:

  • FICA taxes: Employers are required to withhold two Social Security taxes under the Federal Insurance Contributions Act (FICA). FICA taxes help fund Social Security and Medicare and are a percentage of an employee’s gross wages. In 2024, FICA taxes amount to 15.3%, where both employers and employees contribute 6.2% each for Social Security taxes and 1.45% each for Medicare. Additionally, employers must withhold an additional 0.9% Medicare tax on an employee’s wages over $200,000.

  • Federal income taxes: Employers must use Form W-4 to withhold federal income taxes from each employee’s paycheck. Federal income taxes are used to fund a variety of government initiatives, such as essential services like highways, defense, and the justice system. Employers make periodic tax payments to the federal government on behalf of employees by withholding a portion of their wages, which is determined by an employee’s wage withholding preferences stated on their W-4 Form.

  • State income taxes: Similar to federal income taxes, another payroll tax employers are responsible for calculating is state income tax for employees. These taxes are used to fund state programs like schools and police. The amount withheld is determined by each state’s tax rates, though Florida, Texas, and Washington do not have such taxes.

  • Federal unemployment taxes: The Federal Unemployment Tax Act established FUTA taxes, which are used to fund the federal government’s unemployment program. Employers pay 6% on the first $7,000 of each employee’s wages, and these taxes are paid quarterly or annually. However, employers can receive a 5.4% tax credit if they pay into their state’s unemployment fund.

  • State unemployment taxes: SUTA taxes are similar to FUTA taxes, but they are payroll taxes used to fund a particular state’s unemployment program. State wage bases may vary, but if you pay into your state’s unemployment funds, you can reduce your FUTA tax rate by 5.4% to 0.6% when filing Form 940.

  • Local taxes: Depending on your jurisdiction, you may be responsible for calculating, withholding, and remitting local taxes to your local tax department.

How payroll deductions work

Understand Payroll Deductions Thoroughly

When you calculate employer payroll taxes, it’s important to understand how payroll deductions work. In the previous section, we discussed the many payroll taxes your organization may be responsible for calculating and paying to various tax departments. The process of withholding wages from an employee’s paycheck is a payroll deduction. These deductions are typically made each pay period. 

However, not every business has the same pay period. One organization may follow a weekly pay schedule, whereas another may follow a biweekly, bimonthly, or monthly pay schedule. Regardless, payroll deductions must be made each pay period to pay for local, state, and federal payroll taxes. Here are the typical steps employers take to deduct payroll taxes:

 

  • Verify gross pay: First, determine each employee’s gross pay, which is the total amount they earn before any payroll deductions.

  • Calculate mandatory deductions: Next, calculate mandatory deductions, which include federal and state income taxes, Social Security and Medicare taxes, and wage garnishments, if applicable. To calculate these deductions, you will need information on each employee’s tax filing status and salary.

  • Calculate voluntary deductions: There are several voluntary deductions employees may opt into, such as health, vision, dental, and life insurance, along with retirement savings plans. The amount you deduct depends on the employee’s elections and the details of their plan.

  • Subtract deductions: With mandatory and voluntary deductions added up, subtract these from an employee’s gross pay to receive their net pay. Net pay is the amount of money an employee will receive in their paycheck.

  • Provide pay stubs: To keep employees informed on their wages, administer pay stubs each pay period that detail their gross pay, deductions, and net pay for each specific pay period.

  • Remit deductions: Finally, once all payroll deductions are collected from an employee, remit them to the appropriate entities, such as their retirement plan provider, insurance company, and the IRS.

Being an employer also means abiding by local, state, and federal payroll tax laws, which is why working with a payroll service provider who can automate your payroll process is important. From spotting errors and miscalculations to ensuring deadlines are met for paying payroll taxes, payroll tax compliance services can help.

 

 

Calculating payroll taxes

Know Your Payroll Tax Form

For an accurate payroll tax calculation, it’s crucial to understand the necessary forms. These payroll tax forms include the following:

  • Form 940: This form is used to report federal unemployment taxes (FUTA).
  • Form 941: Use this quarterly form to report the federal income taxes and FICA taxes (Social Security and Medicare taxes) withheld from employees.
  • Form 944: If you’re a small employer, use this form to report the same taxes as Form 941, but only file this form once a year instead of quarterly.
  • Form 945: This form is used to report federal income tax withheld from non-payroll payments, such as pensions and annuities.
  • Form W-2: This form is a wage and tax statement that reports each employee’s annual compensations and their local, state, and federal payroll tax withholdings.

Know the difference between form types.

Tip: Differentiate IRS Forms 940, 941, 944 Effectively

To accurately calculate employer payroll taxes, it’s important to understand the differences between Forms 940, 941, and 944. Put simply, Form 940 is the form employers use to report federal unemployment (FUTA) tax and state unemployment (SUTA) tax. Form 941 is an employer’s quarterly tax form to report income taxes and payroll taxes like Social Security and Medicare taxes that they withheld from an employee’s wages, and Form 944 is used by small businesses to report their employer taxes annually.

Accurately calculate payroll taxes for remote employees.

Accurately Withhold Taxes for Remote Employees

Employing remote workers can be challenging, as having employees working in various states can open the door to a wide range of tax requirements. As an employer, it’s crucial to understand tax withholding for remote employees. This includes understanding the concepts of tax nexus, reciprocity agreements, and residency status.

Avoid payroll tax penalties

Avoid Payroll Tax Penalties

Knowing how to calculate payroll tax can help ensure you avoid costly payroll tax penalties, which can include:

  • Missed deadlines: Failing to file and pay payroll taxes by the required deadline can result in a penalty of 2% or deposits that are 1-5 days late, 5% for deposits that are 6-15 days late, 10% for deposits made over 15 days late or within 10 days from when they were first notified by the IRS, and 15% for any unpaid taxes over 10 days after their first notice.
  • Non-payment: Failing to pay payroll taxes but withholding these amounts from employee’s wages can result in a Trust Fund Recovery Penalty (TFRP).
  • Negligence penalty: Any careless, reckless, or intentional disregard of tax laws and regulations can result in a negligence penalty.

Partner With Experian Employer Services For Stress-Free Payroll Tax Compliance

To simplify the payroll tax process, turn to Experian Employer Services. Our payroll tax solution offers a wide range of services, from managing state unemployment taxes to ensuring compliance with your remote workforce. Book a meeting today to learn more.

Explore Payroll Tax Compliance Services