Preparing a Payroll Check

how to figure payroll taxes

By Maire Loughran. Arts/Crafts Business Expert

The first article in this series introduces basic payroll facts. You learn about the importance of the Circular E and get the low-down about various payroll related taxes. This article walks you through figuring out how to calculate gross and net payroll.

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To receive compensation from your business, you need to receive a paycheck too.

Explaining Gross Wages

There's a basic formula to make the calculation from gross to net wages. First, let me explain gross wages. When you hire an artisan to make your arts or crafts or an office worker, you come to a meeting of the minds as to the basic circumstances of his or her employment. One of these circumstances is the rate of pay.

If you pay your employee by the hour, figure gross wages by taking the number of hours they work in the pay period times their hourly rate.

Your payroll as the owner is most likely salaried - that is the some gross wage amount each pay period.

Of course, overtime is another consideration. Without going into all the nuances of the Fair Labor Employment Act, if your hourly employees put in more than eight hours in one day or 40 hours in one week, they are entitled to overtime pay at one and one half times their hourly rate.

This isn't a hard calculation to make manually. Just figure up the additional hours at one and a half times the hourly rate and add it to 40 hours at the regular hourly rate for the total gross wages.

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So if the employee's regular rate is $10, their overtime rate is $15.

Figuring Net Wages

Net wages is what is left after you deduct all applicable employment taxes from gross wages. The first article in this series gives examples of employment taxes. Go back and refresh your memory if need be. At the very least, you have FICA tax and federal withholding tax. Depending on where you live, you may also have state and local withholding tax.

Writing a Payroll

Check

Now it's time to apply these facts to a payroll check. Let's assume that this month you decide to pay yourself $1,000. The $1,000 is your gross wage. What you need to find out now is how much your payroll check (net wage) should be.

The first article in this series introduces basic payroll facts. You learn about the importance of the Circular E and get the low-down about various payroll related taxes. This article walks you through figuring out how to calculate gross and net payroll.

You'll need to consider how to write payroll checks if you arts and crafts business hires employees. And, don't forget, if you incorporate your arts and crafts business you are an employee too. To receive compensation from your business, you need to receive a paycheck too.

Here's the calculation from gross to net wages:

  • Just taking a hypothetical situation, let's say that according to your W-4 form, you are married with one exemption. Depending which Circular E is currently in use the federal income tax amount shown in the tables will vary. Always make sure you get a current Circular E at the beginning of each year.

Checking the tables in my theoretical downloaded Circular E, the federal income tax $120. Remember, I'm more than likely using a different table than you. Your figure will be different. So even if you decide to pay yourself $1,000, make sure you check the table in a current Circular E./li>

  • Next, let's handle FICA's two components. Multiply $1,000 times .062 to get your Social Security tax deduction of $62. Multiply $1,000 times .0145 to get your Medicare tax deduction of $14.50.
  • Assuming you live in a state with a flat withholding tax of 3%, multiple $1,000 by .003 to get your state withholding tax deduction of $30.
  • Your net payroll check about is $774 ($1,000 - $120 - $62 - $14.50 - $30).
  • The next article shows you how to figure out the amount of employee and employer payroll tax deposit you need to make for this payroll check.

    Source: artsandcrafts.about.com

    Category: Bank

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