The company has an obligation to calculate the salaries of its employees accurately. Miscalculations can result in employees' salaries being deducted too much for taxes, social security, medical or medical care costs, and other deductions that make them uncomfortable when calculating annual taxes. Miscalculations can also result in the company being reviewed by government agencies such as the taxation service and possibly getting fined.
Step
Part 1 of 2: Filling out the Form
Step 1. Ask your employees to complete federal and state forms for employee payroll deductions
When starting a new job, all employees must complete a federal Employee Withholding Allowance Certificate, also known as form W-4. The name and structure of the state form will vary from state to state.
- The information provided on an Employee Tax Benefits Certificate tells a company the amount of federal and state income taxes withheld from each employee's paycheck based on filing status and the amount of tax exemption claimed. Keep in mind that the greater the tax exemption claimed, the less the employee's tax deduction from paychecks. However, the employee may owe money when it comes to paying taxes.
- Keep in mind that you may be doing business in a country that does not require state income taxes, where there are no forms for state withholding taxes. Since the state does not require its citizens to pay taxes, there is no reason for your employees to fill out payroll deduction forms.
Step 2. Verify that the form has been signed
Remember that federal and state documents are invalid unless signed.
Step 3. Double-check the calculations on the form
While the calculations on the form may be very easy (usually just adding a few 1's), it's better to double-check to make sure the employee has added the numbers correctly.
Part 2 of 2: Calculating Net Salary
Step 1. Determine the gross salary of the employee
Before you start calculating an employee's salary, you should know the gross salary of the employee. The amount is calculated by multiplying the number of hours worked in the pay period by the hourly rate. For example, if an employee works 40 hours in a pay period and the rate is $15 per hour, you would multiply 40 by $15 to get a gross salary of $600.
Step 2. Get a table of federal and state income taxes
The federal income tax table outlines the amount of individual federal income tax owed by salary, amount of tax exemption, and filing status. The tax office has published an income tax table on online services. You can look up state income tax tables online by visiting your state supervisory office's website.
Step 3. Apply federal and state income taxes
You can use the tax table you get to apply the appropriate federal and state income tax amounts for withholding taxes.
- For federal taxes, you look for the amount of withholding based on the employee's gross pay, filing status, and the amount of tax exemption claimed. Then, you will subtract the amount from the gross paycheck.
- For state taxes, consult your state department's income website for instructions on the amount of withholding tax.
Step 4. Apply the social security tax rate
Calculating the amount of social security tax that must be paid is very easy because it is a fixed percentage of the employee's income. Companies must understand that they are also responsible for paying social security taxes. The current social security tax rate is 6.2% for employees.
Step 5. Take medical care tax deductions
Just like social security taxes, medical care taxes are also a fixed percentage of a person's income. In addition, the company is also responsible for paying medical care taxes. The medical care tax for current employees is 1.45%.
Step 6. Subtract the other pieces
Employees may have voluntary contributions or mandatory deductions that must be deducted from their gross pay.
- Examples of voluntary contributions include 401 contributions, deferred compensation plans, long-term disability plans, and flexible expense accounts.
- Examples of mandatory deductions include child support and divorce allowance.
Step 7. Calculate the total net salary
The amount remaining after these deductions are deducted is the net salary. Repeat your calculations and make sure that you haven't made any mistakes.
