When you have reached the time to release payments to your employees, you have come to the right place. Our employment tax liabilities guideline teaches you to calculate the payroll tax liabilities in the most efficient manner. After going through our guidelines, you will be enabled to handle and manage withholdings and deductions in all states. Employers will find it easy to calculate the net pay, determine how much to hold back, and how much to write in the employee’s paychecks.
The steps our calculator uses to figure out each employee’s paycheck are pretty simple, but there are a lot of them. Here’s how it works, and what tax rates you’ll need to apply.
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Federal Tax Rates: Calculation of Payroll for an Employee
1. Finding out Gross Wages of Employees: Gross wages are the total amount of money that the employee earns in the current pay period. This not the case for the hourly, salaries, and contractors. Let us find out the for the salaries of hourly, salaried and contractors:
- Hourly Employees: You must multiply the hourly pay rate with the number of hours the employee has worked. If the employee had worked overtime hours, you must make sure to calculate the overtime hours also.
- Salaried Employees: A salaried person is given a fraction from the annual salary paycheck. So, you must divide that annual salary by the number of times it is released each year.
- Contractors: As an employer, you cannot deduct the tax amount from the contractor’s salaries. You must pay them their invoices. You must remember to send every contractor 1099 form at the end of the year. You should keep the payroll records that will make this process easier.
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2. Subtract Pre-Tax Withholdings. You do not only deduct the payroll taxes, but also the health and retirement benefits. The process of the documentation and the remittance of the funds will vary from one organization to another – based on the benefits providers. In the payroll software, you can integrate many services that automate the deductions.
3. FICA Taxes: FICA (Federal Insurance Contributions Act) refers o the social and medical security taxes that employers and employees have to pay. These are detailed below:
- Social Security Tax: If the gross pay of the employee is $137, 700 in a year, you may withhold the 6.2% of every employee’s taxable wage. In 2020, the employee will pay the $8,537.40. The employer must also match the employee’s contributions.
- Medicare Tax: For the medicare policies, employers may withhold 1.45% of every employee’s taxable wage under FICA. Employers are instructed to match this tax as well. Though there is no withholding limit, well-off employees, earning more than the $200,000, are required to pay the additional medical tax of 0.9%. You may not match the 0.9%, but these withholdings must be included in your calculations.
4. Liable for the Payment of Federal Unemployment Taxes: The taxable income is $7,000 that an employee earns annually. The tax rate is 6%. If your company pays into a state unemployment fund, your Company becomes eligible for a tax credit.
5. Deduction of the Federal Income Tax: The tax ranges from 0% to 37%. You can find further withholding information from the official website of the Federal Income Tax Institution.
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6. Minus the Post-tax Deductions: There are some employees who must fulfill the obligations ordered by the court, such as child support. Such employees can choose post-tax contributions for the savings accounts, elective benefits, and other withholdings.
In addition to the federal taxes, employees must count and apply the local and state taxes. The Maths for the process is the same.