- 1). Calculate federal income tax using the employee's W-4 form and the IRS withholding tax tables (Circular E). Retrieve the employee's filing status and number of exemptions (allowances) from the W-4. Use the Circular E's percentage alternative or the wage bracket method to figure the tax. The percentage method may be used at any time. Use the wage bracket alternative when the employee has less than 10 exemptions and his income falls within the wage range.
For instance, say she earns $610 weekly and claims single/two. Based on page 41 of the 2010 Circular E, withhold $50 for weekly federal income tax. - 2). Figure state income tax, if it applies. Note that Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming do not charge state income tax. If applicable, consult the employee's state tax form for his filing status and allowances and use the state withholding tax tables to figure the tax.
For instance, say his state is Rhode Island. He earns $500 weekly and claims married/one. According to page 12 of the Rhode Island Employer's Income Tax Withholding Tables, the state income tax would be $11.66 weekly. - 3). Withhold Social Security tax 6.2 percent of the employee's gross earnings, up to the annual wage base of $106,800. For instance, say the employee earns $1,300 semimonthly.
Calculation: $1,300 x .062 = $80.60, semimonthly Social Security withholding.
The employer pays a matching amount of Social Security tax for each employee.
Stop the withholding when the employee reaches the yearly wage limit. Continue it when the New Year begins. - 4). Withhold Medicare tax at 1.45 percent of all of the employee's gross earnings.
Calculation: $1,300 x .0145 = $18.85, semimonthly Medicare withholding.
The employer also pays a matching amount of Medicare tax for each employee. - 5). Calculate federal unemployment (FUTA) tax--only the employer pays this tax. The 2010 FUTA tax rate is 6.2 percent of the first $7,000 in wages you pay to each employee.
For instance, say the employee earns $30,000 for the year. Your FUTA tax for just that employee for the year is $434 ($7,000 x .062).
If you paid state unemployment tax, you are eligible for a maximum credit of 5.4 percent against your FUTA tax. If the 5.4 percent credit applies, your FUTA tax rate is .8 percent. - 6). Figure state unemployment tax--only the employer pays this tax. Get your state tax rate and the wage limit from your state workforce (DOL) agency. Then, multiply the wages paid to each employee (up to the wage limit) by the state tax rate to arrive at your SUTA tax.