How to Calculate the Tax Liability for the Payroll

As a business owner, you have a responsibility to take into considerations taxes when processing payroll. You must make sure you correctly calculate your employee’s tax withholdings. Above all, you must make contributions to federal programs. These programs include unemployment insurance, social security and Medicare. This requirement is clearly stipulated under the Federal Unemployment Tax Act (FUTA) and Federal Insurance Contribution Act (FICA). You must also use payroll tax calculator to calculate your payroll tax liability accurately to avoid penalties.

Calculating Social Security Tax.

The social security tax rate changes and varies with time. As per now, the tax rate is 12.4 percent. This varies by year, therefore, you should verify with the IRS the current rates. For every business, this is split twice so that 6.2 percent is taken care of by the employer and the other half is paid by the employee. To calculate the social security tax, you multiply 6.2 percent or 0.062 by the payroll figure. As an employer, the law stipulates that you only contribute tax of up to the first 127,200 dollars of each of your employees earning as per this year. This wage limit will be 128,700 in 2018.

Calculating unemployment tax.

For this only the employer makes contributions to the Federal Unemployment Tax Act (FUTA). As per now, the employers are required to pay up to 6 percent for the first 7000 dollars that each employee makes. To be able to calculate this amount, you multiply 0.06 by each employee earning up to 7000 dollars. For example, if all your employees earn at least 7000 dollars, you will multiply 0.06 by 7000 dollars which will be equal to 420 dollars. If you have 2 employees, it will be 420 multiply by 2 hence a total of 840 dollars. But this tax rate varies with time too.

Calculating Medicare Tax

The Medicare tax rate is 2.9 percent as per now. Like for social security tax, this amount is split into two. The employer is responsible for 1.45 percent while the employee pays the other half. Medicare has no wage base limit. You, as the employer, pay taxes for the full amount that your employee earns. To calculate, you must multiply your total payroll by 0.0145 using a payroll calculator.  This Medicare tax percentage varies from year to year. It is wise to verify the exact percentage with the IRS.

Determine if you must pay Medicare surtax.

On 26th November 2013, a Medicare surtax of 9 percent became effective. It applies to employers with workers that reach a certain earning. This amount depends on the employees filing status as below.

Filing status                                               Threshold Amount

Married filing separately                                   125000

Married filing jointly                                         250000

Single                                                                 200000

Qualifying widow with dependent child            200000

Head of household (with qualifying persons)    200000

After calculating your contribution for the above, and them together to get the total. You can use the payroll tax calculator for this. Some are available online. This will help you and your business to stay compliant hence avoid penalties and being sued.

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