How to calculate payroll taxes: complete guide

What do a regional supermarket chain with hundreds of employees and a family-owned hardware store have in common? Payroll taxes. No matter the size of your business or the sophistication of your operations, if you pay employees, you also need to calculate and withhold payroll taxes on their behalf. But how much to withhold? And what rates apply to which workers?

In this guide, we’ll cover the most common questions about calculating US payroll taxes, including the documents and data you’ll need and the formulas to use.

What are payroll taxes? 

Payroll taxes are taxes employers withhold from employees’ wages and pay to the federal, state, and local governments to fund programs like Social Security, Medicare, and unemployment insurance. In the US, payroll taxes are mandatory under federal law and in states that require them. In some cases, your business may also be subject to local payroll taxes to fund designated city- or county-level services.

Types of payroll taxes

Before you run payroll, it’s important to understand the different types of payroll taxes US employers need to withhold. Rates vary depending on the specific tax and jurisdiction, and correct calculations depend on knowing which taxes apply to what portion of your employee’s compensation. 

FICA tax

Federal Insurance Contributions Act (FICA), taxes fund the Social Security and Medicare programs, and employers and employees contribute equally. The total tax rate for Social Security is 12.4%, which means the employer and employee pay 6.2% each. Likewise, employers and employees split the 2.9% Medicare tax rate down the middle.

FUTA tax

Employers pay Federal Unemployment Tax Act (FUTA) taxes to fund federal-level unemployment insurance programs. Employees do not contribute. The FUTA tax rate is 6.0% and applies to the first $7,000 paid to an employee in wages per year. 

SUTA tax

Employers pay State Unemployment Tax Act (SUTA) taxes to fund state-level unemployment insurance programs. Like FUTA taxes, employees don’t contribute. Specific withholding rates and wage limits vary from state to state, so it’s important to check with your state’s Department of Revenue or tax authority.

Example: In California, businesses pay an Employment Training Tax of .01% on the first $7,000 earned by every employee. In contrast, Nebraska only requires employers to deduct state income and unemployment insurance taxes from workers’ paychecks.

Income tax

Income tax is paid entirely by employees but calculated, withheld, and paid by employers. The amount depends on the employee’s earnings and filing status. While federal income taxes are mandatory for all US citizens and most residents, state income taxes vary. Florida, Nevada, Alaska, Washington, Texas, Wyoming, and Tennessee have all chosen to forgo a personal income tax. 

Other state and local payroll taxes

In some states and cities, payroll taxes fund additional programs that supplement those at the federal level. New York, for example, assesses a payroll tax on employees amounting to .037% of their gross income to fund the state’s paid family leave program. In Oregon, employers in Eugene and the surrounding Lane County withhold between .087% and .79% of an employee’s gross wages to find the city’s TriNet transit system. 

Before you calculate payroll taxes

Accurately calculating and withholding payroll taxes requires up-to-date information and carefully filed paperwork. A payroll management system can help streamline document and data collection, though an efficient filing system can also do the job.

W-4 form

Employees use Form W-4, Employee’s Withholding Certificate, to inform their employers of their tax situation. When calculating how much federal income tax to withhold from each paycheck, you’ll rely on the information here, which includes marital status and number of dependents. Some states also require employees to complete a separate Form W-4 for state tax purposes.

I-9 form

In the US, the Form I-9, Employment Eligibility Verification Form, is used to verify that every new hire is work-authorized. Employees complete the form at the time of hire. You’ll need to collect this no later than three days after your employee joins the company and verify it against an approved identity document, such as a passport.

Direct deposit authorization form

A direct deposit authorization form isn’t required to calculate payroll deductions, but it streamlines the payroll process by allowing you to automate the actual payment portion of the payroll process. With a direct deposit authorization, your organization can route employee pay directly to their bank accounts.

How to calculate payroll taxes in the US: 5 essential steps 

1. Determine employee’s gross wages

Start by determining your employee’s gross wages for the pay period. This is the original amount an employee earns before any payroll taxes or pre-tax deductions are withheld. For hourly employees, multiply the number of hours worked during the pay period by the hourly rate. For salaried employees, divide the total annual salary by the number of pay period in the calendar year.

Example: Jordan earns $75,000 per year as a junior software developer for Widgets, Inc. Widgets, Inc. operates on a bi-monthly pay schedule and pays employees twice monthly. Jordan’s gross pay for each pay period is $3,125.

2. Calculate FIT

To understand how much federal income tax you need to withhold, you’ll consult the employee’s Form W-4 for information about marital status, dependents, and any other adjustments. You’ll also want to consult the IRS’ withholding tables for guidance on wage levels.

Example: Jordan’s W-4 indicates that they file a joint return with their spouse. Because Jordan’s spouse also works, they have checked the box in Section 2 of the Form W-4, directing Widgets, Inc. to adjust withholding accordingly. Widgets, Inc. withholds $226 from each of Jordan’s paychecks, plus 22% of compensation above $2,573.

3. Calculate FICA taxes

Next, you’ll want to start thinking about how to calculate Social Security tax and Medicare tax. Employers and employees contribute equally to these taxes, each paying 50%. For employees earning more than $200,000 annually, an additional Medicare tax of 1.8% applies, shared between employee and employer.

Example: Widgets, Inc. must deduct 6.2% of Jordan’s gross pay in Social Security taxes and 1.45% in Medicare taxes. Based on earnings of $3,125 per pay period, Jordan contributes $193.75 to Social Security and $45.31 to Medicare from each paycheck.

4. Take out any applicable deductions

Once you’ve worked out the big-ticket items like FIT and FICA, you’ll need to subtract any pre or post-tax deductions from your employee’s paycheck. 

Pre-tax deductions, as you might guess from the name, are deducted from the employee’s gross earnings. Post-tax deductions are drawn from their earnings after you’ve subtracted federal income, Social Security, and Medicare taxes.

Example: Jordan contributes to Widgets, Inc.’s 401(k) retirement plan and makes payments towards a health savings account and a life insurance policy from each paycheck. Money put towards retirement savings and healthcare is deducted from Jordan’s pre-tax income, while the funds for life insurance are taken out after Widgets, Inc. has withheld FICA, FIT, and the retirement and healthcare payments.

5. Add any expense reimbursements

Finally, you’ll reimburse your employees for any approved expenses. It’s important to save this step for last, because reimbursements aren’t taxable. Depending on your organization’s spend policy, qualifying expenses could include travel costs, office supplies, or business meals. 

Example: Jordan works from home two days a week and maintains a dedicated home office. During the most recent pay period, Jordan purchased a new monitor for $300. This expense qualifies for reimbursement under Widgets Inc.’s spending policy. After deducting FIT, FICA, and other allowances, Widgets, Inc. adds $300 to Jordan’s paycheck.

How to calculate payroll taxes: 3 examples

Looking for an example of payroll tax calculations? Below, we walk you through three hypotheticals demonstrating how to find and withhold the correct amounts.

1. SUTA

Joe’s Coffee in Los Angeles opened last year and now employs three full-time workers. In California, new employers pay tax at a rate of 3.4% on the first $7,000 of an employee’s compensation.

SUTA = (.034 * 7,000) * 3

SUTA = 210 * 3

SUTA = 630

Joe’s Coffee will pay $630 total in SUTA taxes this fiscal year—$210 for each of its three employees.

2. FICA

Employers withhold 6.2% of employees' taxable wages for Social Security and 1.45% for Medicare, up to certain wage limits. Alex earns $50,000 per year as a machinist for Acme Corp. 

FICA = (.062 * 50,000) + (.0145 * 50,000)

FICA = 3,100 + 725

FICA = 3,825

Acme Corp. will withhold $3,825 from Alex’s paychecks to cover the employee portion of FICA—$3,100 for Social Security and $725 for Medicare.

3. FUTA 

While employers can earn a credit towards FUTA taxes by paying their SUTA taxes on time, the starting rate for FUTA is 6.0% on the first $7,000 of an employee’s compensation. Let’s go back to Joe’s Coffee and its three full-time workers.

FUTA = (.06 * 7,000) * 3

FUTA = 420 * 3

FUTA = 1,260

Joe’s Coffee will pay a total of $1,260 in FUTA taxes to the IRS–$420 per employee. 

How to calculate payroll taxes in other countries

Depending on where you employ your workforce, you may find yourself navigating multiple sets of payroll tax obligations. Countries as diverse as Canada, France, Japan, South Africa, and Brazil require employers to withhold some portion of employees’ compensation to support healthcare and unemployment insurance programs. 

If you’re struggling to work out how to calculate payroll tax expenses in another jurisdiction, you may want to consider specialized payroll software or working with an employer of record (EOR). Dedicated payroll solutions can offer valuable peace of mind by automatically calculating and withholding the correct amounts. Even better, some will submit your tax forms on your behalf to local authorities. An EOR goes a step further, managing the entire payroll process from end-to-end on your behalf. 

Rippling: Automated payroll taxes for your employees

Using natively built software, Rippling Payroll offers a seamless data pipeline that consolidates all your payroll functions on a single platform for a globally compliant pay run. Combined with Rippling’s suite of benefits management and time and attendance tools, it streamlines the entire payroll process. With Rippling, you can:

• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 
• Manage time and attendance natively 
• Run unlimited off-cycle pay runs at no extra cost 
• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that automatically pay out at whatever interval you choose
• Automatically calculate prorated pay runs for new or promoted employees 
• Automatically calculate overtime
• Pay employees and contractors on the same platform
• Make changes after submitting payroll

FAQs on how to calculate payroll taxes

What are the forms used to report payroll taxes to the IRS?

Employers must submit several forms to the IRS to report annual and quarterly payroll taxes. Form 940 records an employer’s FUTA taxes and is submitted annually, while Form 941 records FICA taxes and is filed quarterly. Employers must also file copies of the Forms W-2 and 1099-NEC that they distribute to their employees.

How do I handle payroll tax for independent contractors?

In most cases, you won’t withhold payroll taxes for independent contractors. As non-employees, contractors are responsible for their own Social Security and Medicare contributions, which they pay directly to the federal government through self-employment taxes. You’ll need to issue a Form 1099-NEC to any contractor you pay more than $600 in a fiscal year and collect a Form W-9. 

How are state payroll taxes calculated?

State payroll taxes are calculated based on each state’s unique rates and rules. You’ll typically need to calculate state income tax, unemployment insurance, and, in some states, disability insurance. For information on rates and wage limits, refer to your state’s Department of Revenue or Department of Taxation.

This blog is based on information available to Rippling as of October 25, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.