Payroll taxes: Definition and how to calculate them

Compliance

We'll cover the things most people miss about payroll taxes. And, we’ll teach you how to calculate the payroll taxes themselves.

Matt Redler
December 2, 2021

Definition

Each pay period, employers are required to withhold certain amounts of money––known as payroll taxes––from their employees’ paychecks. Then, employers give this money to the government. It might sound complicated, but it isn’t: If you’ve ever sent or received a check with things like “Social Security” and “Medicare” deducted, you have experience with payroll taxes.

Below, we’ll cover the things most people miss about payroll taxes. And, we’ll teach you how to calculate the payroll taxes themselves.

Payroll taxes: Cheat sheet 

  • There are three main types of payroll taxes. FICA, income, and unemployment are the three types of payroll taxes you should know about. Federal unemployment tax is unique: It’s the only one that you’re fully responsible for paying––you won’t deduct it from your employees’ pay.
  • If you have employees, you’re responsible for payroll taxes. This is true in the United States and most anywhere in the world. The IRS requires you to withhold FICA taxes (Social Security and Medicare) from your employees’ paychecks.
  • You’ll deduct federal income tax, too. Each of your employees will fill out a Form W-4 when they begin work with you, which tells you how much to withhold from their pay each period. Unlike FICA taxes, which are the same for everybody, income withholdings are specific to each employee.

How to calculate payroll taxes

There are two types of calculations here: FICA taxes and income tax. When people think of payroll taxes, they’re usually referring to FICA taxes––so we’ll start with those:

  • To calculate payroll tax, multiply your employee’s gross income (for the pay period in question) by 7.65%. That’s it! Now you have the number you’ll need to withhold––in FICA taxes––from your employee’s gross pay.

For example: If an employee made $1,000 in a pay period, you’ll deduct $76.50 from their paycheck. 6.2%, or $62.00, of that deduction is for Social Security. The remaining 1.45%, or $14.50, is for Medicare.

Withholding income tax from paychecks

Aside from Social Security and Medicare, you’ll likely also withhold income tax from your employees’ paycheck. The process here depends entirely on the employee.

Here’s how it works:

1. Your employee fills out, and delivers, a completed Form W-4 that gives you information about exemptions and withholdings. The employee can also direct you not to withhold any income tax from their paychecks.

2. You use this information to withhold income tax from your employee’s paychecks. It’s on the employee, not you, to make sure the withholding information is correct.

If you don’t know: Not every employee gets their W-4 in on time. If you don’t know what to withhold, the IRS instructs you to withhold taxes as if your employee were single with no other adjustments.

You can learn more about the Form W-4 process in our article here.

More key things you should know about payroll taxes

  • They don’t apply to independent contractors. Contractors are responsible for paying their own taxes.
  • The money doesn’t all come from your employees’ pockets. As an employer, you’ll have to match your employee’s FICA tax (meaning if they pay $76.50, so do you), and you’ll have to pay unemployment tax.
  • Payroll taxes exist overseas, but they’re different. If you’re hiring globally, you’ll want to keep up-to-date on payroll tax laws. In some countries, the laws can be very convoluted.

Global payroll taxes don’t have to be hard

Payroll tax requirements change by country. It can be a headache. But we spend our days working on that headache and making the global hiring process an easy one for you. With Panther, you can hire people in most parts of the world in just a couple of clicks. 

This isn’t a QVC infomercial, so we’re not going to tell you that you’ve got to use our services now or ever: But if global compliance and payroll sounds interesting, you can learn what we’re all about here.

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