How to Calculate Federal Taxes on Gross Pay

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The federal government requires employers in the United States to withhold Social Security tax, Medicare tax and federal income tax from employees' wages. IRS Circular E has the withholding and payment procedures for each of these federal taxes. In most cases, you are mandated to withhold taxes on an employee's earnings before any other deductions are taken out; these earnings are also called gross pay. Each tax on gross income requires a different calculation.

Step 1

Compute Social Security tax at 4.2 percent of gross pay up to $106,800 for the year, at the time of publication. For example, the employee earns $1,000 semimonthly. The calculation is: $1,000 x .042 = $42 semimonthly. Once an employee earns the maximum wage base for the year ($106,800 for 2011), stop the withholding and resume it at the start of the next year.

Step 2

Figure Medicare tax at 1.45 percent of all gross pay. For example, an employee earns $420 weekly. Calculation: $420 x .0145 = $6.09 weekly. Withhold Medicare tax from all wages paid to the employee for the year, since no annual wage base applies.

Step 3

Calculate federal income tax according to the employee's W-4 data and IRS Circular E's tax withholding tables. Obtain the employee's filing status from line 3 of her W-4 form and her allowances from line 5; find the Circular E tax withholding table that matches this information plus the employee's gross wages and pay period. For example, in 2011, the employee earns $500 weekly and claims single with one allowance on her W-4. According to page 38 of the 2011 Circular E, she pays $51 weekly in federal income tax.

Tips

  • To calculate an employee's gross pay for the pay period, add up all of his regular work hours (up to 40 hours for the week) and multiply them by his regular pay rate. If applicable, add overtime hours (those more than 40 for the week) and multiply them by 1 1/2 times the employee's regular pay rate. Add total regular and overtime earnings to arrive at total gross pay. Consider your state's overtime laws when calculating overtime pay; some states require overtime payment if the employee works a certain amount of hours for the day.
  • If an employee has a Section 125 plan, such as a medical or dental plan that meets IRS Section 125 requirements, deduct the benefit from her gross pay before withholding federal taxes.

References

About the Author

Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.

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