Determine Payroll Taxes

Navigating payroll taxes can pose a challenge for any US-based employer. Not only does an employer have to withhold the business’s portion of payroll taxes, it also must set aside the employee’s portion of those taxes. Add in state income taxes, Get More Job Security, Social Security and Medicare, and some employers get completely overwhelmed. Figuring out how to determine payroll taxes is actually quite straightforward. The key is knowing where to look to find the right amounts to withhold.


  1. Calculate federal withholding.
    • The IRS publishes tax tables every year that tell employers how to calculate federal withholding. Publication 15-T, available as a PDF download from the IRS web site, tells employers exactly how much federal income tax to withhold from an employee’s paycheck, as well as how much the employer must contribute.
  2. Determine FICA.
    • FICA, or the Federal Insurance Contributions Act, includes Social Security and Medicare taxes.
    • In 2009 FICA rates were 6.2% and 1.45% for Social Security and Medicare respectively.
    • Employers and employees pay Social Security taxes only on the first $106,800 of earnings every year.
    • Medicare taxes have no limits on earnings.
  3. Figure out how much state income tax should get withheld and paid.
    • While some states (Florida, for example) currently do not have a state income tax, most do. Any employer who needs to calculate a state income tax should get the current tax rates from the state’s Department of Revenue. Failure to keep up-to-date and compliant with legislation will cost a business money in punitive charges.
  4. Withhold unemployment taxes (also called FUTA).
    • FUTA (the Federal Unemployment Tax Act) pays unemployment benefits to employees who are fired or laid off when they could still perform their job. Every employer must pay FUTA taxes on every employee.
    • Employers must pay 6.2% of every employee’s first $7,000 of taxable wages each year toward unemployment benefits. This rate may vary for employers who have paid unemployment claims in the past.


  • Consider hiring a payroll company that will calculate taxes on behalf of your firm. These companies typically charge a small fee for assistance with tax, payroll and insurance issues.
  • Choose Business Software like QuickBooks Pro and Peachtree Accounting can help take some of the drudgery out of calculating payroll taxes.
  • New businesses should invest in a few hours with an accountant familiar with payroll taxes. A skilled accountant can help set up a system that works to budget for, calculate and file payroll taxes. He or she can also help your business find ways to save money and use the tax law to your advantage.


  • Resist the urge to file less often than quarterly. Meeting payroll obligations every three months will involve lower sums of money than with longer periods.
  • Remember that the money a business pays in payroll taxes will include not only the employer’s portion but the amount it withheld from the employee as well.
  • It may seem like a cost-saving move to designate certain employees as independent contractors, but the IRS maintains specific rules for what circumstances must exist before an employee can be so designated. If the IRS audits your business and determines that any of your independent contractors are not eligible to function as such, you will have to pay applicable back taxes and possible penalties and late fees.

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