You will need to withhold payroll taxes from the paychecks of your employees. These may include federal income tax and Social Security and Medicare taxes. In addition, you need to match each of their Social Security and Medicare contributions.

You can use payroll and accounting software to compute your payroll taxes automatically for you. It doesn't only calculate these but, in addition, deduct these for you and make the respective payments to the appropriate governmental agencies. Whichever path is chosen- using a payroll service or managing payroll through manual processes, it does help to have a better understanding of how payroll taxes work. It will avoid mistakes in the withholding tax and keep the company or an individual compliant with federal as well as state tax statutes.

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What is Payroll Tax?

Payroll tax relates to the taxes that employers are to deduct from employee pay checks and also contribute to these include Social Security, Medicare, and income taxes. Among the taxes that need to be deducted from a single employee's check there include:

• Federal income tax
• Income tax at state and local
• Social Security and Medicare or FICA taxes

Matching contributions for employees' Social Security and Medicare taxes also falls to employers. All withheld taxes are supposed to be forwarded to relevant government agencies at specified reporting times.

For businesses to manage these taxes well, many use payroll software like QuickBooks Payroll. Some businesses might seek an accountant to maintain compliance with the tax liabilities.

How to Collect Employee Tax Information

Whenever you hire a new employee, he or she must complete IRS Form W-4, the Employee's Withholding Certificate, which gives details about their tax filing status, dependents, and other allowances. The form helps you calculate how much tax to withhold from his or her paycheck.

Some states will require additional tax forms for determining state income tax withholding, whereas others will use the information from the W-4 form. It is wise to know your state's specific tax rules because not all states have an income tax.

To ensure that you meet your payroll tax obligations, you should consider using payroll software or consulting a tax professional.

Federal, State, and Local Income Taxes

The majority of employees in the United States are subject to federal income tax on their earnings. The federal tax system is progressive; that is, tax rates rise as income rises. As an employer, you will need to calculate each employee's gross pay and use the information from their IRS Form W-4 to determine the appropriate federal tax withholding.

State Income Taxes

Currently, there are 9 states with no income tax to collect at state level - Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming and Tennessee. Other states maintain their separate rates for their respective income tax and as the employer it will be duty-bound to withhold and pay income tax collected on account of where your employee works. Many payroll or tax calculators allow one to make this kind of state selection.

Local Income Taxes

In addition to federal and state taxes, certain cities, counties, or municipalities may have local income taxes. If you are required to pay these, you will also need to withhold and pay them. Chances are good that if your state doesn't have a state income tax, neither will your local taxes apply. Make sure you get the correct information from local tax offices about local withholding requirements.

FICA (Medicare and Social Security) Taxes

The FICA taxes fund Social Security and Medicare programs. In the two programs, the amount to be contributed is shared by the employee and the employer. The total FICA tax rate is 15.3%. Half of it or 7.65% is paid by the employee, and the other half is paid by the employer. That means you, the employer, must match the employee's contribution to Medicare and Social Security taxes.

FUTA Taxes

Employers are required to pay 6% of the first $7,000 that each employee earns yearly under the Federal Unemployment Tax Act (FUTA). Most states give a 5.4% tax credit that brings down the federal rate to 0.6%. Employees do not have to pay FUTA taxes. However, in order to get this state credit, employers may need to file some extra IRS forms. The self-employed do not pay FUTA taxes.

How to Calculate Payroll Taxes

Income Tax Calculation:

• The wage bracket method is where federal income tax is determined with IRS's income tax tables on earnings of an employee along with filing status. The Percentage Method should be applied, in case the amount earned by an employee exceeds $100,000.
• Percentage Method: This method also relies on the IRS income tax tables to determine the percentage and flat dollar amount to withhold based on an employee's earnings. The combined amount is the withholding deduction.

FICA (Medicare and Social Security) Tax Calculation:

FICA taxes are set at a flat rate of 15.3%. Employees pay 7.65% and employers match this amount with a 7.65% contribution.

For those who do not use payroll software or an accountant, one can calculate manually using payroll calculators or spreadsheets. However, payroll software does make it easier because it automatically calculates tax withholding. It does not, however, send the taxes to the IRS unless using full-service payroll software. It is always a good idea to double-check calculations since employers are responsible for any errors in tax filings.

Compare the Best Payroll Software Costs and Features

Provider	Starting monthly base price	Monthly fee per employee	Free year-end tax filing	Health benefits administration	Free trial	Get started
	$19.99	$4.00	✓	✓	2 mon	See Plans
	$40.00	$6.00	✓	✓	Free demo	See Plans
	$79.00	$4.00	✕	✓	3 mon	See Plans
	$39.00	$5.00	✕	✓	2 mon	See Plans
	$40.00	$6.00	✓	✓	1 mon	See Plans