Basic Payroll Tax Withholdings

In this article, we will take a look at the basics of how payroll taxes are computed. Before you begin, be sure to have a completed W4 for for each employee for whom you want to compute payroll taxes for. The IRS provides many helpful guides and tutorials. For federal payroll taxes, you will need a copy of the Employer’s Tax Guide (publication 15), which can be found at: For state taxes, keep in mind that each state may charge different tax rates. It is important that you find copies of your own state and local tax tables.

First, review your employee’s W4. Make sure the form is complete, legible, and correct. Take note of the employee’s tax filing status, as well as the number of allowances taken by the employee. These two figures will be used to look up the proper withholding amounts in the tax tables later.

Let’s illustrate the process with an example. For this article, we will compute the basic taxes for Tom, a fictional employee. Tom works full-time (40 hours per week), and receives a wage of eight dollars per hour. Tom is married, and has one child. He claims 2 withholding allowances on his W4.

Step1:  Federal Income tax

First, find the table corresponding to the employee’s filing status. Since Tom is married, we will use the married persons table to compute his federal social security taxes. Tom’s weekly income in January is $320. We find the row on the table corresponding to $320. Next, we consider that Tom has two withholding allowances. We then look across the row to find the column for two withholdings. Where the row and column intersect in the table, we will find the required tax withholding. For Tom, the correct federal social security tax withholding for Tom is $4.

Step2:  State Income tax-

State social security taxes are computed in the same way as the federal social security taxes. Simply use the corresponding social security tax table in the literature provided by your state.

Step3: Federal Unemployment Tax

Federal unemployment tax is equal to 6.2% of the first $7000 earned by an employee in a given year. Since it is still January, Tom has not earned $7000 yet, and his paycheck is subject to the unemployment tax withholdings. On $320, this amounts to $19.82 withheld from Tom’s pay.

Step4:State Unemployment Tax

State unemployment tax is calculated in much the same way, however, check with your state to find the applicable tax rate.

Step5: Social Security Tax

Social security tax is easy to compute. Simply withhold 6.2% of the first $106,800 earned in a given year. For tom’s paycheck of $320, we would withhold $19.82.

Step5: Medicare tax

Medicare tax is even easier to compute. Simply withhold 1.45% of all compensation. In Tom’s case, this amounts to $4.64.

In this article, we have a reviewed the Basic Payroll and Tax Withholdings for payroll taxes and how they are computed.