Accounting And Payroll

How To Calculate Payroll Taxes the Right Way

Over six million small and medium-sized businesses in the US have issues with payroll taxes. So you see you’re not alone. With employees to pay, inventory to order, and keeping customers happy, it’s a juggling act.

With all the day to day operational things to deal with, thoughts of the IRS and tax codes take a back seat.

Keep things simple

Tax and coding need not be complicated if you know how to deal with it. Learn the mathematics behind it and the process is straightforward. Calculating payroll taxes with accuracy is critical.

Employee confidence in payroll will be high while IRS involvement, intervention, and auditing remain low.

Owners and administrators of small businesses now have options other than manual payroll calculation. Companies are moving away from manual calculation of payroll, in favor of an integrated hourly payroll app.

An app which integrates timekeeping and payroll functions frees up the time in the payroll management process. Less time spent on manual calculation means more time on other business critical tasks.

Before making a payroll run, even with timekeeping and payroll software, there are processes which need completing. Before a run, all employees should have completed the following documents:

·        Form W-4: Employee’s Withholding Certificate

·        State W-4 (as applicable)

·        Direct Deposit Authorization Form

·        Form I-9: Employment Eligibility Verification

The IRS Form W-4 should be complete and up to date. The employee should enter their name, social security number and their permanent address. This information is essential. This is key information required for an accurate federal income tax deduction.

The State W-4 is for calculating state and/or local income tax deductions. Some states have their own withholding forms, some do not. Up to date information is available at the Federation of Tax Administrators website.

The Direct Deposit Authorization Form is only required if an employee’s wages are to be paid directly to a bank account. If an employee is being paid in cash or paper check, then this will not be required.

Form I-9 should be completed by all new employees. It should be accompanied by a copy of their driver’s license and social security card, or a copy of their passport. Either way, they will need to prove their eligibility for work in the US.

Simple math

The calculation of payroll tax is simple if the math is known. It can be summed up in five steps as follows:

·        Calculate gross pay – hourly rate x hours worked = gross pay

·        Calculate tax withholding using local, state and federal tax tables

·        Deduct tax due from gross pay

·        Add expense reimbursements if applicable

·        Add everything together minus tax deduction and you have the net pay per employee

If you’re using a timekeeping and payroll app the process only needs to be set up once on the app. Calculations are then processed based on the  start and finish times entered by the employee. 

From week to week the tax withholding calculation is made. If the gross pay increases or decreases due to early finishes or overtime, the calculation is processed automatically.

Keeping on top of payroll and employee timekeeping can be integrated into a single process.  Customers can be assured they are billed accurately for work undertaken.

Employees can see they are not being short-changed by employers. If you are audited by the IRS your records will be accurate and all taxes due paid.