How is payroll tax calculated?

This includes salaries, hourly wages, and any additional income like tips, commissions, or other taxable income. It does not include items like reimbursements for business expenses, such as car mileage.

• Multiply the number of withholding allowances an employee has claimed on their W-4 form by the amount of one allowance for the length of their pay period and their filing status

Also subtract any necessary deductions, including items like contributions to a specific retirement plan. The remaining sum is the employee's taxable income.

• Determine the amount of federal income tax to be withheld

Federal income tax is calculated with the assistance of a series of tax brackets that have percentage increases as the employee's compensation goes up. Employers must reference the current year's tax tables to determine the proper figures to use in this calculation.

• Determine the amount of any state or local income tax to be withheld

Every state is different. Employers must reference their own state's formula to accurately perform this step.

• Calculate the amount of Medicare and Social Security taxes to be deducted from an employee's paycheck

These are both considered to be flat-rate taxes. Employers should multiply an employee's gross wages by 6.2% to get the right amount for Social Security, and 1.45% to get the right amount for Medicare.

• Figure federal (FUTA) and state (SUTA) unemployment taxes

These are employer-paid taxes. Employers need to calculate the SUTA tax first according to the laws of their state. FUTA tax is 6.2% of the first $7000 of an employee's compensation. Employers can take a credit of up to 5.4% for SUTA taxes that are paid, which can result in a reduction of the FUTA tax.