No businessperson wants to get a message from an employee or the Internal Revenue Service saying that payroll taxes were calculated incorrectly. Payroll deductions are usually figured using a computer nowadays. However, computer systems can go down. If you know how to calculate deductions for single employees and figure take-home pay, you can get payroll out on time without a computer. In addition, understanding the process of figuring payroll tax deductions allows you to check for errors.
Establish Gross Pay
The first step required to calculate paychecks is to determine the employee's gross pay or gross earnings. For workers paid hourly, multiply the hours worked in a week by the hourly pay rate. If an employee worked more than 40 hours, multiply hours in excess of 40 by 1.5 times the hourly rate.
For salaried employees, base pay is generally the annual salary divided by the number of pay periods in one year. Add any bonuses, commissions or other taxable amounts to the hourly earnings or salary base pay.
Compute Social Security Deductions
Use the employee's gross pay with no deductions to calculate Social Security tax and Medicare tax. Multiply gross pay by 6.2 percent to find the amount of Social Security tax. If gross pay is $500, multiply $500 times 6.2 percent (0.062), which equals $31. As of 2019, Social Security tax is levied only on the first $128,400 of yearly wages.
Stop deducting this tax if the year-to-date gross pay exceeds this amount. The income cap changes periodically, so check IRS Publication 15, Circular E for the current amount.
Compute Medicare Deductions
The tax rate for Medicare is 1.45 percent of gross pay. There is no income cap for Medicare, so figure and deduct this tax on all earnings. Note that employers must pay a matching amount of Social Security and Medicare tax. When an employee's year-to-date gross pay tops $200,000, deduct the additional Medicare tax of 0.9 percent on all earnings in excess of $200,000. Employers do not pay a matching amount of additional Medicare tax.
Subtract Any Pretax Deductions
Not all of an employee's gross pay is subject to federal income tax. You must subtract the amount of withholding allowances and other deductions to find the taxable income. Compute the value of a withholding allowance by dividing the current amount of one personal exemption by the annual number of pay periods.
For example, one personal exemption was $4,050 in 2017 (personal exemptions is now gone under the Tax and Job Cuts Act). Divide by 52 to find the weekly amount, which works out to $77.88. Look on the employee's W-2 form and multiply the number of allowances claimed by $77.88.
In this example, you have $155.76 if the employee claimed two allowances. Subtract this amount from gross pay. Suppose the gross pay is $500. Subtract $155.76, leaving $344.24. You might need to subtract other nontaxable amounts as well. For instance, deduct contributions to a retirement plan and health insurance premiums.
Determine Federal Income Tax for a Single Employee
Single and married employees are taxed at different rates. Check the employee's W-2 form to find out which set of tax tables to use. For workers who file as single or head of household, use the employee single-rate tax tables.
Federal income tax is a progressive tax, meaning the percentage tax rates increase in a series of brackets as the taxable income rises. As of 2019, the tax bracket percentages were 10, 12, 22, 24, 32, 35 and 37 percent. Look on the appropriate percentage tax table in Publication 15, Circular E.
For a single employee paid weekly with taxable income of $500, the federal income tax in 2019 is $18.70 plus 12 percent of the amount over $260. This works out to be $47.50. The $500 gross figure is used here because personal exemptions do not exist for the tax year 2019.
Calculate Take-Home Pay
Calculate a single employee's take-home pay by deducting Social Security tax, Medicare tax and federal income tax from gross pay. If the gross pay is $500, Social Security and Medicare combined come to $38.25. The employee's federal income tax is $47.50. After these amounts are subtracted, the take-home pay comes to $414.25.
If you are in a state that levies a state income tax, follow state rules to calculate and deduct the state income tax. Don't forget to subtract amounts like contributions to a retirement plan.
