Kathryn McCawley
Jul 29, 2021

How to Calculate Payroll Taxes

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Running a business means needing to be an expert in an overwhelming number of topics. Probably one of the most daunting of all is taxes. Taxes - the inevitability of every business owner. You’ve got to pay them. And, more specifically, payroll taxes are your responsibility as a business owner. So whether you're a producer or you own a casting agency, it's time to get into the nitty-gritty to figure out how to calculate payroll taxes. 

So, what are payroll taxes again? 

Alright. Before we even start on how to calculate payroll taxes, let’s do a short recap.

Payroll taxes are taxes employers pay per employee determined from an employee’s wage, salary, and tips. They are employee and employer-paid taxes, meaning both you and your employee contribute to them. 

As an employer, you might ask yourself, how do I pay taxes for my employees?  

After all, it’s your responsibility to calculate that amount and withhold the employee contribution from their paycheck.

These payroll taxes refer to FICA (Federal Insurance Contributions Act), which funds Medicare and Social Security and is contributed to by employees and employers, as well as FUTA (Federal Unemployment Tax Act), which funds unemployment benefits and is only paid by the employer.

For more on these acts, check out our Payroll Compliance 101 guide. 

But wait, what about withholdings?

Whenever you find yourself asking, “how do I pay taxes for my employees,” you’ll be dealing with tax withholdings. It’s important to note that when beginning to figure out employees’ taxes, paycheck withholdings are different than the money you deduct from employees for payroll tax.

Payroll FICA taxes are employee and employer-paid taxes. In other words, half will be paid by you as the employer, and the other half will be paid by the employee. 

Withholdings, on the other hand, are an employee’s income tax. Employees are solely responsible for paying it. However, as the employer, you’re the one withholding it each paycheck. This amount will be determined by an employee’s W-4 form, and you will submit it to the IRS.

How to pay payroll taxes for your employees

Now onto the big stuff. How to calculate payroll taxes, how to pay payroll taxes, and how to avoid an unfortunate run-in with the IRS.

The basic process runs down as such:

1. Calculate your employee’s payroll tax.

2. Withhold employee and employer funds.

3. Report tax to federal and other relevant agencies.

4. Deposit taxes by the due dates.

If that sounds basic, we know that, as with most things, how to pay payroll taxes is easier said than done, so let’s get into the details of each step.

1. Calculate payroll taxes

Payroll FICA and FUTA taxes are calculated from an employee’s gross taxable wages.

Gross taxable wages include the cumulative salaries, wages, and tips. However, this won’t include non-taxable income or pre-tax deductions, such as expense reimbursements or health insurance deductions.

Once you determine the gross taxable income, you determine the amount for FICA (Medicare and Social Security), FUTA, and state/local payroll taxes.

Keep in mind that these are all payroll taxes, but payroll tax calculation methods and percentages vary according to each tax within them.

FICA tax

FICA is the federal payroll tax paid by the employee and employer that contributes to Medicare and Social Security.

The employee will pay 7.65% from their salary while you, the employer, will pay a matching 7.65% of their salary as well.

Social Security tax

Social Security tax takes up the bulk of the tax percentage you and your employee will contribute to FICA.

Social Security tax draws 6.2% of the employee’s wages as well as a matching 6.2% from you, the employer.

However, there is an important distinction to note when determining how to figure out employee taxes. 

Consider wage base.

Past a certain wage base – which can change each year – you and the employee do not have to pay the percentage past a certain amount. For 2021, that wage base is $142,800.

So let’s spell it out with a payroll tax calculation example:

Say you currently have an employee whose yearly salary is $180,000. 

For Social Security, you and your employee are only liable for $8,853.60, 6.2% of $142,800. 

The additional $37,000 will not be taxed.

Medicare

Again, Medicare is paid by both the employee and employer. Both employee and employer are responsible for 1.45% of the employee’s salary.

Unlike Social Security, Medicare has no wage base, but it does have an additional percentage for higher earners that surpass $200,000 per year.

For employees that earn up to $200,000 per year, the employee and employer are both responsible for paying 1.45% of their salary. However, when it passes that threshold, funds exceeding the high earning maximum are subject to an additional .9% percent. 

In other words, the money surpassing $200,000 will be subject to a 2.35% tax. However, only the employee will be responsible for this additional tax.

How to calculate payroll taxes - How do I pay tax for my employees and my business you may ask. It’s a common question and you’re not alone.

Let’s look at another payroll tax calculation example:

You find yourself asking how do I pay employees payroll taxes for those high earners. So you have an employee that makes $250,000 per year.

  • For the first $200,000: Both you and the employee will pay 1.45% of that amount. So you both will pay $2,900.
  • For the additional $50,000: As the employer, you will pay 1.45% of the $50,000. So $725 in total. The employee, however, will be responsible for 2.35% of that $50,000. So a total of $1,175.
  •  In total, you as the employer will be responsible for $3,625. The employee will be responsible for $4,075.

FUTA tax 

FUTA, or the Federal Unemployment Tax Act, supports benefits for unemployment. Questions of calculating and paying your employees’ payroll taxes won’t actually apply here. Because unlike FICA, FUTA is among the employer-paid taxes and does not pull from employee salaries.

Employers are responsible for a tax contribution of 6% of each of their employee’s salary. However, only the first $7,000 of an employee’s salary is subject to FUTA. So for an employee that earns $50,000 per year, only $7,000 will be taxed and $420 contributed on the part of the employer.

If an employer pays SUTA, or State Unemployment Tax, and files a 940 form, they are usually eligible for a 5.4% reduction in their FUTA tax. With this reduction, businesses that aren’t in credit reduction states can only be responsible for 0.6% of the first $7,000 of their employees’ salaries.

State payroll taxes

In addition to Federal Payroll taxes, including FICA and FUTA, most states and many towns have local payroll taxes.

FICA and FUTA tax percentages are fixed, but payroll tax calculation methods vary widely from state-to-state. While some states may have fixed rates for payroll, others may be regressive, similar to income tax, and change according to your salary.

2. Withhold employee funds

Once you’ve figured out how to calculate payroll taxes, you’ll then take those calculated funds as the employer withholding tax from your employees’ paychecks. All employer payroll tax withholdings will be noted on your employees’ pay stub under deductions.

With both the employer and employee side contributions, you’ll then have to put aside those funds until your next tax deposit.

How to Calculate Payroll Taxes - Withholding Employees' Funds Graphic - Wrapbook

There are several ways to manage your payroll tax withholding:

  • Deposit in your business bank account
  • Create a separate payroll bank account for deposits
  • Use a payroll service to handle payroll taxes.

There are several options for how to figure out payroll taxes and their withholdings, but it’s integral to keep that money and deposit it in a timely manner to the tax agencies. Not paying on time comes with heavy penalties.

One of the increasingly popular options for handling payroll includes working with a payroll service. As a business, it’s a tough balance of running your normal operations and learning how to figure out employee taxes. 

Running a production and business is enough work as it is, payroll should be the last thing on your mind. Wrapbook specializes in running production payroll, calculating, and withholding employee and employer taxes so you don’t have to. 

How to Calculate Payroll Taxes - Software to Withhold Employee Funds - Wrapbook
Use software so employees' funds are automatically withheld.

Wrapbook also submits these taxes to the IRS so that you can avoid any penalties. Feel free to reach out to the team at any time for more info on this, or download our Payroll Compliance Checklist. 

3. Report payroll taxes

A larger part of how to figure out payroll taxes is the process of reporting them to the IRS and state/local tax agencies. For federal payroll tax, there is a quarterly cycle that keeps you regularly reporting payroll.

For most businesses, you will use Form 941 to report payroll at the end of each quarter.

How to Calculate Payroll Taxes - Filing by Quarters End - Wrapbook

Quarter end dates:

  • March 31st
  • June 30th
  • September 30th
  • December 31st

The Form 941 is due on the last day of the month following the end of the quarter.

Failure to comply with these due dates can amount to significant penalties.

How to Calculate Payroll Taxes - 941 Form - Wrapbook
Use the 941 to file quarterly - it's always best to consult a tax professional.

For some smaller businesses with small tax liability, the IRS will allow them to file annually. In this case, you will file a Form 944 by January 31st.

Unlike FICA payroll taxes, FUTA demands a slightly different reporting schedule. For FUTA, you will report your tax liability on Form 940 and submit it by January 31st.

As for state and other local payroll taxes, they can vary state-to-state, but many follow the quarterly reporting deadline. To stay compliant, make sure to stay up to date on your state and local taxes filing and due dates. The benefits of working with Wrapbook is that we handle both federal and state payroll taxes, and make sure both are filed and deposited accordingly. 

4. Deposit to agencies

Compared to the sometimes convoluted process of calculating payroll taxes, the question of how do I pay my payroll taxes, is much easier. 

Know the due dates.

Deposit dates vary based on the amount of your tax liability. Schedule options are semi-weekly, monthly, quarterly, or annually. However, unless you are an incredibly small business, most payments will be paid either monthly or semi-weekly. 

This will be determined by your Form 941 filing. To determine which payroll tax due dates apply to your business, read IRS Publication 15.

All Federal IRS deposits can be easily submitted online through the Electronic Federal Tax Payment System (EFTPS).

If the IRS has not automatically enrolled you, you can easily create an account. Be sure to have your employer identification number, business bank account, and routing number prior to enrolling. Be sure to enroll two weeks prior to the payment deadline.

Submit your payment by 8 pm EST the day before payments are due. You will receive a tracking number to keep for your records.

Luckily, how to pay payroll taxes has become easier with online submissions. EFTPS provides an accessible interface.

How to Calculate Payroll Taxes - EFPTS Dashboard - Wrapbook
Questions of "how do I pay my employees payroll taxes and my business’s tax liabilities" can drift away once you’ve calculated them.

As for FUTA tax, the deposit schedule does not follow the same monthly or biweekly schedule of your other payroll taxes. You will also pay through the EFTPS, but FUTA payments are due for each quarter: on the last day of the following month.  

When and how to pay payroll taxes by state and city varies. Much like the EFTPS, most states have their payroll processed completely online. 

For an example of how to deposit state payroll taxes, check out a video explaining how to pay payroll taxes and deposit them in California.

Be sure to stay on top of your state and local payroll taxes, as you can also accrue penalties. 

Penalties for non-compliance

The IRS is not playing around when it comes to your federal tax liabilities. As a business, you are expected to know how to calculate payroll taxes, adhere to payroll tax deposit due dates, and follow tax filing deadlines.

Failure to deposit your payroll tax on schedule or file your Form 941 or other relevant quarterly payroll reports will result in fines that increase based on your delay.

  • 1-5 days late: 2% of tax liability fined.
  •  6-15 days late: 5% of tax liability fined.
  • 16+ or within 10 days of IRS notice: 10% of tax liability fined.
  • 10+ days after first IRS notice: 15% of tax liability fined.

In addition to penalties for late deposits, you can be subject to interest rates on your tax liability that ranges from 3% to 6%.

If you fail to pay your payroll taxes, you could be subject to a tax lien.

Ten days after filing your tax forms, if you have failed to pay your liability within 10 days, a tax lien will be filed by the IRS. Money owed to the IRS will supersede all other debt obligations. It will also be on record, affect your credit score, and drastically impede your ability to take out a loan.

With all this in mind, keep up with your payroll! Know your deposit schedule and download our payroll compliance checklist to be sure you stay on top of filing.

How to Calculate Payroll Taxes - Payroll Compliance Checklist - Wrapbook

When working with a payroll service like Wrapbook, payroll deposits and filing are handled for you, so you don’t have to worry about penalties.

But, what if I’m self-employed?

As your own employee, you’re still going to be wondering about how to pay self-employment tax. When you’re self-employed, you have to be the ultimate multitasker, and we’ve got you! 

How to pay payroll taxes for the self-employed does vary from employee/employer payroll, so we’ll also discuss some of the differences you’ll be dealing with.

How to pay self-employment tax

Self-employment comes with its own amazing freedoms and power in your work. But it also comes with its own unique challenges.

How to Calculate Payroll Taxes - Self-Employment Tax Image - Wrapbook
How to calculate payroll taxes - Self-employment will have you handling a lot of work by yourself. But hey! You’ve got control. Surround yourself with plants and have at it.

Self-employed payroll taxes are often referred to as SECA, or the Self-Employment Contributions Act tax. Similar to a business, you will be responsible for Medicare and Social Security tax. And the same percentages apply that an employee and employer contribute. FICA taxes amount to 15.3% of your total net wages: 12.4% for Social Security and 2.9% for Medicare.

While those percentages would be split between employee and employer for a business – 7.65% paid by each party – you will have to cover both sides. However, you can deduct the employer equivalent contribution from your gross income when calculating your income tax.

And, of course, you’ve got to file. 

For your yearly filing, you will submit your Form 1040 with your calculated income. As for the question of when are payroll taxes due for self-employment, you will need to file and submit your self-employed payroll taxes quarterly with Form 1040-ES.

For deposits, you’ll also pay through the Electronic Federal Tax Payment System (EFTPS).

How to Calculate Payroll Taxes - 1040 Form - Wrapbook
Self-employment taxes has a ton of considerations - consult a tax professional.

When you’re lamenting on how do I pay my payroll taxes?, remember that there is now a huge community of people choosing the freedom of self-employment. There are plenty of self-employment resources to help you along. And luckily, how to calculate payroll taxes is very similar to businesses.

Conquer your payroll tax fear!

Trust me, we know it can be incredibly daunting when you’re facing filing forms and impending deadlines as you are first navigating how to pay payroll taxes. 

But once you get the steps down, those seemingly endless moments of “how do I pay my payroll taxes?” or “how do I pay my employees payroll taxes?” will become less frequent. 

It takes patience, going through a payroll tax calculation example or two, and just a few cycles to get the hang of things. 

Wrapping Up

As a business, you’re handling multiple responsibilities- how to calculate payroll taxes is but one. Luckily, with the expansion of specialized businesses, there are new solutions there to help.

From compliance checklists to payroll services like Wrapbook, take advantage of resources and professionals available to you to help with these, often tedious, tax and payment calculations.

Disclaimer

At Wrapbook, we're all about providing the very best free resources to producers and their crews. However, this post is not a substitute for professional legal advice. Answers do not create a company-client relationship, nor is it a solicitation to offer legal advice. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your decisions or rights.

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About the Author

Kathryn McCawley

Kathryn is a Los Angeles-based artist-designer passionate about everything entertainment. As both an illustrator and writer, she is interested in how the two worlds meet through animation. You can frequently find her either at your local plant shop or zipping around on roller skates.

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