Payroll Tax Withholding for Employers & How Employees Can Check Them

Payroll Tax Withholding for Employers & How Employees Can Check Them

As a small business owner, you are certainly not the only one if you have difficulty calculating withholding tax. It's complex and can be very costly, but we're here to help you check the things you need to do before issuing your employees' paycheck. Let's start from the beginning. 

What is withholding?

The Internal Revenue Service requires any business with employees to withhold certain taxes from employee payslips and then file them with state and federal agencies. Federal withholding taxes may vary from employee to employee based on the information provided in W-4. Still, FICA taxes on Social Security and Medicare are calculated using a formula defined for all employees. Therefore, the first step for you as an employer is to obtain the employee-specific deduction information that you need. 

Before you get started, remember that only about 40% of small business owners manage their own payroll (and all withholdings, deductions, and tax returns). Entrepreneurs who rely on a payroll service or a professional save an average of 15 hours per month. If you think you might need help, here's a checklist you can use to choose between payroll solutions. 

Step 1: All new employees must complete a W-4 form on the first working day

You must receive a completed Form W-4 from each employee prior to payroll processing in order for the correct amount of federal tax to be withheld. The form includes full instructions, including a guide for people with multiple jobs or a working spouse.

All employees must complete a W-4 when they are employed or when their life or financial situation changes. 

In 2020, the W-4 was revised. The new form features a five-step process and a new publication 15-T (Federal Income Tax Withholding Methods) to determine withholding tax. It has stopped using withholding allowances. 

If your employee was hired on or before 2019, you could continue to use the information you previously provided in W-4. It includes a spreadsheet that allows employees to calculate payroll deductions for employees and children. Some employees may want to complete a new W-4 form if they have a second job, get married, have a child, or are divorced.


Do not forget! Hang on to those W-4 or W-9

All employees must complete a completed Form W-4. They don't expire, but employees can choose to update their information at any time. It is vital to note that only employees need to complete a W-4. Anyone hired as a contractor must complete a W-9 form to ensure they have the information they need to process 1099 by the end of the year.

Step 2: Determine the gross salary

You will then calculate the employee's gross salary before determining the amount of withholding tax.

For hourly employees: 

  • Calculate the base salary of employees for the number of hours worked. For example, 60 hours x $15.00 per hour would be $900.00.

  • Overtime is normally calculated a time and a half, so five overtime hours would be calculated as $5 x $15.00 x $1.5 = $112.50. For an employee who works 60 hours plus five hours of overtime at $15 an hour, his gross pay would be $900.00 + $112.50 = $1012.50.

For salaried employees:

Salaried employees receive the same every pay period. For a semi-annual pay period, an employee earning $53,000 per year will receive $53,000, divided into 24 annual pay periods, bringing his gross salary for the pay period to $2,208.33.

Step 3: Calculate the federal withholding tax on the basis of the gross salary

Federal withholding tax can be determined after calculating an employee's gross salary. This is where W-4 comes in. You will see the payroll deductions they have chosen, including any additional taxes they have been asked to deduct. 

You'll need to access the Internal Revenue tax tables for 2021 to calculate everything accurately, or you can use reliable payroll software or a tax professional to do the calculations for you.

Step 4: Calculate FICA contributions

Then you will calculate the FICA payroll taxes. FCIA is a combination of social security and health insurance, and both employer and employee contribute to it. You will keep a total of 7.65%, of which 6.2% for Social Security and 1.45% for Medicare. Remember that employers must withhold Social Security taxes until the employee earns at least $142,800 per year. There is no income limit for Medicare taxes. 

To calculate FCIA, use the following for hourly or salaried employees: 

  • For a gross salary of $1012.50, multiply 1012.50. x 6.2% = $62.78 by the social security tax

  • For Medicare tax, multiply $1012.50 x 1.45% = $14.68

  • The total FCIA to be withheld for this payment period is $62.78 + $14.68 = $77.46

In addition to Medicare and Social Security taxes, employees earning over $200,000 per year will also pay a 0.9% Medicare Surcharge, which will be deducted from their checks in addition to other FICA taxes. 


Step 5: Combine employee contributions to FCIA

In addition to deducting FICA taxes from employee wages, employers are also responsible for adjusting the amount of FICA taxes withheld, so if $77.46 has been deducted from your employee, you will need to match this amount and deposit the funds with time.


Step 6: Calculate state and local taxes

Depending on your business location, it may be necessary to calculate state and local taxes. Remember to send these local charges to the appropriate agency.


Step 7: Pay Your Federal, State, and Local Taxes On Time

Tax filing programs vary from state to state, and many require quarterly filing, so check with local agencies to decide what your schedule will be. There are currently two filing schedules; monthly and semi-weekly. At the start of the year, entrepreneurs will be informed of the deposit schedule to use. 

Whether you process your business payroll in-house or use a leading payroll service provider or the services of an expert, it's up to you to make sure that taxes are calculated correctly and paid on or before the due date. Businesses that do not produce on time may be subject to a penalty of 15% plus interest on taxes owed.

Employees are encouraged to check their withholding tax

On the part of the employee, withholding tax is the amount of income tax that your employer pays on your behalf on the paycheck. Changes in tax legislation may affect withholding tax.

How to check withholding tax

You can use the IRS withholding tax estimator to calculate income tax and compare it with the current withholding tax. You will need the last payslip and the last tax return.

The estimator can help you determine whether you need to complete a new Form W-4 for your employer. Or the results may indicate that you must make an estimated tax payment to the IRS before the end of the year.

If you adjusted your withholding tax part way through 2021, the IRS recommends that you check the withholding taxes. Do this in early 2022 before filing your federal income tax return to make sure the correct amount is withheld.

Find your Adjusted Gross Income (AGI)

If you change your withholding tax, you will need to know the adjusted gross income (AGI). You can find your AGI number on the previous year's income tax return. If you don't have a copy of last year's tax return, you can get it from a transcript of your tax return.



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