Paying your team is like throwing a party — until you realize that a party is no fun when it turns into an endless math problem. No need to freak out. Follow these eight steps to figure out how to calculate your employee’s paychecks on your very own:
- Tally your employee’s gross wages from their employment agreement or time sheet. Gross wages include tips, commission, and overtime (if it applies to them).
- Figure out which wages are taxable. Pre-tax benefits such as some retirement plans and health insurance premiums are deducted before taxes come into play.
- Check your employee’s W-4 form for their filing status and withholding allowances. For example, someone can file as a married couple and take three allowances. If the W-4 is not available, you should assume your employee is single and taking no allowances. Does your team have any burning questions? Send them the worksheet on the back of the W-4 form.
- Determine their federal income tax withholding amount by using the IRS Publication 15 (Circular E). Choose either the percentage method or the wage bracket method and use the appropriate chart to help you through it.
- Calculate your employee’s contributions for Social Security taxes. This rate is currently 6.2% and the wage base for 2019 is $132,900. Once your employee has reached a cumulative gross pay of $132,900, no extra Social Security tax is withheld.
- Add up your employee’s contributions for Medicare Tax. This rate is currently 1.45% with no wage base. After your teammate reaches a cumulative gross pay of $200,000 (if single, $250,000 if married filing jointly), they’ll be subject to additional Medicare withholding at a 0.9% rate.
- Calculate the state and local tax for each employee. All states have state unemployment and most have state income tax as well. Ohio and Pennsylvania are hotspots for local taxes, but be sure to check the regulations where you live to see what is due. If your employees live in a bunch of different states, you’ll need to figure out each individually according to the state where they perform their work. Use this directory of state government websites to give you a head start.
- It’s finally time to figure out their net pay, which is the amount that will show up on their paychecks. Jot down the formula below, and you’ll be ready to calculate your team’s paychecks like it’s nobody’s business.
(Gross payroll) – (Taxes) – (Benefits/deductions) + (Reimbursements) = Net pay
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Updated February 4, 2019
This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.