Calculating Payroll Taxes 101

For many employees, payday is up there with Christmas and birthdays — but even better since it comes around more than once a year. For employers, on the other hand, payday can be a never-ending and sometimes pretty stressful responsibility. While payroll services and software are readily available, employers may still have to devote a good chunk of time and grit to comply with both employment and tax laws to make sure payroll flows smoothly each pay period. Thankfully, there are some general guidelines to follow when it comes to basic payroll calculations.

Laying the Groundwork
An employee should complete a federal tax withholding form, also known as the Employee Withholding Allowance Certificate, or W-4 form. A state tax withholding form may also be required. Based on the form(s), the company can then calculate how much money to deduct toward taxes (more on that soon).
Before it’s time to crunch numbers, it’s necessary to determine each employee’s gross pay (generally the number of hours worked in a pay period multiplied by the hourly rate). For instance, if an employee logged 40 hours at $20 an hour, his gross pay would be $800. If required, calculate overtime for non-exempt workers (at least one and a half times the regular rate of pay after 40 hours worked in a workweek). Exempt workers are not required to be paid overtime. Check out the Department of Labor’s criteria on overtime.

Calculating the correct amount for the taxes can be tricky. While it would be simple if taxes were based on employees gross pay, payroll generally doesn’t work like that.

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