Payroll tax calculations can be an intimidating part of running a small business. Understanding the guidelines can help ensure that your withholding amounts are accurate. Businesses that are liable for employee and employer tax contributions must file tax statements and make payments on a quarterly basis, so keeping accurate records of your payroll and withholding amounts is essential.
Calculating Employee Withholding
Review the W-4 that each employee submitted to determine the number of withholding allowances claimed. Multiply the total allowances by the amount set by the IRS for each allowance. For example, in 2012, the IRS allowance amount equals $73.08 for weekly payroll processing. If the employee claims four allowances, multiply $73.08 by three for a total of $292.32.
Reduce the gross pay by the amount of the withholding allowances to determine the total pay that is subject to federal withholding. If your employee earns $600 and claims three allowances, reduce the gross pay by $292.32 for a taxable earnings amount of $307.76.
Check the IRS withholding charts to determine how much to withhold.
Locate the pay frequency and marital status on the chart. The payroll cycle may be weekly, biweekly, semi-monthly or monthly. Find the pay range that includes the amount of taxable earnings for the employee. For example, if a married employee has $307.76 in taxable earnings in 2012, you would withhold 10 percent of the earnings above $156, or $15.17.
Calculate Medicare and Social Security withholding based on gross pay. As of 2012, withhold 1.45 percent of each employee's gross earnings for Medicare. Social Security withholding applies to all earnings up to a predetermined amount. In 2012, Social Security withholding of 4.2 percent applies to all earnings up to $110,000. In this case, you would withhold $8.70 for Medicare and $25.20 for Social Security.
Calculating Employer Liability
Identify the Federal Unemployment Tax liability. As of the 2012 tax year, employers are required to pay a 6 percent contribution on the first $7,000 paid to each employee for Federal Unemployment Insurance.
Determine your Medicaid liability total. The Medicaid liability percentage for 2012 is 1.45 percent and applies to all gross salary payments.