Mistakes to Avoid When Calculating Your Payroll Tax
Calculating your payroll tax can seem a little daunting, but once you have the process in place you'll realize that it's actually very simple! There are just a few basic things you need to keep in mind to avoid some of the common mistakes.
What Are Payroll Taxes?
Payroll taxes are the taxes that employers have to pay when they pay salaries to employers. The employers have to pay taxes based on what they pay, then the employee’s salary is taxed and the money is withheld from their paychecks. The withholding covers the advance payment of income taxes, social security contributions and different insurances that they may have. It’s important to accurately calculate your payroll taxes so that you don't have any headaches or money owed down the road. How do you know how much to deduct from each of your employees' paychecks?
How to Calculate Your Payroll Tax
A number of different factors impact your federal payroll taxes. The amount will differ depending on the employees’ marital status, number of withholding allowances and gross earnings, as well as different salary reductions they might have. Follow these steps to calculate your payroll taxes:
1. Determine the employee’s gross pay. This is the total amount they receive during one pay period.
2. Determine filing status and withholding allowances. Are they filing as single or married? What withholdings do you need to account for?
3. Determine the withholding amount for Federal Income Tax by going to IRS Publication 15 (Circular E). Choose between the Percentage Method and the Wage Bracket Method.
4. Calculate employee contributions for Social Security Taxes. The Social Security tax rate is 4.2% and cannot top $106,800.
5. Calculate employee contributions for Medicare Tax. This rate is 1.45%, and all wages are subject to this tax.
6. Determine employer contributions for Social Security and Medicare. The employer contribution rate is 6.2% for Social Security and 1.45% for Medicare.
7. Based on your state and local laws, calculate state and local tax percentages.
Mistakes to Avoid
It’s easy to make mistakes when calculating payroll taxes, but it's also easy to avoid them with the right information in mind. Doing them correctly is crucial to avoiding problems down the road with your employees or with the IRS. Here are some common mistakes that can be avoided when calculating your payroll tax:
1. Using the wrong chart. Make sure you double check which chart you are using and find the right one.
2. Misunderstanding federal and state laws. Try to familiarize yourself with the laws, and seek professional help if you have any questions or are in doubt about something.
3. Using the wrong filing status. Make sure you’re up to date on your employee’s filing statuses.
4. Keeping poor records. Keeping accurate and up-to-date records for all of your employees is essential. In the event you get audited, this information will be invaluable.
5. Bad math. Double and triple check your math if you're calculating your payroll tax by hand. It can help to use a software program or online calculator to make sure you're getting the right figures.
6. Using last year's tax rates. This stuff changes all the time ,and if you don't stay up to date with the current tax rates and information, you could end up miscalculating.
Your business can handle payroll and taxes with confidence. Follow these steps and you'll avoid common pitfalls that can stand in your way of running an efficient business!