How to Calculate Taxes From the Gross or Hourly Rate

By Victoria Bailey - Updated March 15, 2018
pay check

check in macro image by Alexey Klementiev from Fotolia.com

When looking to hire new workers, employers will likely be asked by potential employees how much money they're going to make. How much is $12 per hour after taxes, anyway? As a business owner, you're required to withhold a certain amount from each employee's paycheck for a variety of tax purposes. Miscalculating this amount can make you liable for substantial fines and penalties from the Internal Revenue Service. The tax rate is subject to change every year, so it's crucial that you verify the rate at the beginning of each year to ensure that you're withholding the correct amount.

Tip

The IRS requires that every business withholds taxes from its employees' paycheck. You can calculate the amount of the taxes to be withheld using a basic mathematical formula.

Find Your Employee's Gross Pay

The first step in figuring out payroll is to find the amount of gross pay each employee earns during the week. This is the amount they've earned before any taxes have been taken out. Take the hourly rate and multiply it by the number of hours worked. For example, an employee making $12 an hour who worked 40 hours earned a weekly gross pay of $480.

Calculate Exemptions

Each employee will have filled out a W-4 form when she was first hired. This form includes, among other things, the number of exemptions she is allowed to claim. These exemptions reduce the employee's tax burden by reducing the gross pay that can be taxed. Tax and exemption rates change annually. For every exemption an employee declares in 2018, you should subtract $79.80 from his gross pay. For example, if the employee claimed three exemptions, subtract $239.40 from the gross pay of $480, leaving a taxable income of $240.60.

Check Income Tax Withholding Tables

The Internal Revenue Service posts and publishes charts with the exact percentage of taxes to be withheld for each income bracket, based on how often employees are paid. Find the correct amount for your workforce on the chart. For instance, if your employees are paid weekly, the employee in our example fits in the bracket of those paid over $71, but not over $254. The chart tells you to take 10 percent of everything earned over $71. Take the taxable income of $240.60 and subtract $71, which will leave 169.60. Ten percent of that would be $17.00. That is the federal tax to be subtracted from your employee's paycheck.

You may have additional state, county or city income taxes that need to be withheld from your workforce. Obtain the appropriate tax tables to find the rate for each taxing body, and use this same formula to figure out those taxes.

Calculate Withholding for Medicare and Social Security

The rate for Medicare withholding is 1.45 percent. Multiply your employee's taxable weekly income of $240.60 by 1.45 percent to get $3.49. The rate for Social Security withholding is 6.2 percent for the first $128,400 of the employee's annual wage, so for the employee in our example, $240.60 multiplied by this rate results in Social Security withholding of $14.91.

Determine the Final Pay

Add all the deductions together: federal, state and local taxes, Medicare and Social Security. In our example, the total amount of withholding is $35.40. Subtract this number from the original weekly gross pay, which was $480, to result in a total net paycheck of $444.60.

About the Author

Victoria Bailey has a degree in Public Law and Government. She has spoken before state Supreme Court justices and her photograph is on the back cover of Bill Clinton's autobiography. As a former member of the Center for the Study of the Presidency and Congress, Bailey worked closely with lawmakers to help set public policy. Bailey's work appears on numerous websites, and she's currently writing the text for a governmental information app.

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