Withholding Employee Taxes

An employer is responsible for paying Social Security tax, Medicare tax, federal withholding tax and state withholding tax for it’s employees. All taxes collected from the employees are deposited in the Accrued Payroll Taxes account in the liability section of the balance sheet. It sits there until the company needs to pay the government entities. In calculating the amount withheld, it’s important to know the current withholding percentage for the tax year.

Social Security & Medicare Tax

In 2011, the employee tax rate for social security tax is 4.2%. The employer tax rate remains unchanged at 6.2%. The Medicare tax rate is 1.45% for both the employer and employee. The amounts are withheld from the employee’s paycheck while the employers amount is calculated and paid. Both are sent to the IRS. All the employees earnings are to be reported by the employer to Social Security. For the social security tax, a percentage is determined yearly by the federal government to reflect increased salary levels. Medicare tax however has no income cap, so this percentage is taken out of the entire earnings for the year.

To calculate either tax, simply multiply the employee’s earnings per month by the percentage to be withheld. Withhold that amount from the employee’s paycheck and make sure the employer’s share matches the amount as well.

Federal Withholding Tax

Calculating the federal withholding tax is a little more complicated. You calculate the tax based on an employee’s income and the tax rate. In addition, you need to be aware of the number of exemptions the employee is claiming on his/her W-4. Use Publication 15 for a breakdown in percentages and to adjust for the number of exemptions selected by the employee.

State Withholding Tax

This varies from state to state. You need to be informed about the specifics of your state’s income tax. Some states base their income tax on a percentage of the federal withholding amount while others use tables or percentage methods similar to the federal withholding tax. The employee may need to complete a form declaring state withholding allowances.