What you actually calculate as an employer
As an employer, you calculate and withhold taxes from each employee's paycheck, then send those withheld amounts to the IRS and your state. You also pay a separate employer tax on top of what you withhold. The withholding comes from the employee's gross pay; the employer tax comes from your business account. Most employers use payroll software or a payroll service to do this automatically, but understanding the pieces helps you catch errors and know what you owe.
The main taxes you handle are federal income tax withholding, Social Security tax (6.2% of wages up to an annual cap), Medicare tax (1.45% of all wages with no cap), and state income tax if your state has one. Some cities also require local income tax withholding. You remit withheld amounts to the IRS on a schedule — usually monthly or semi-weekly depending on your payroll size — and you pay your own employer portion of Social Security and Medicare on the same schedule.
Key Takeaways
- You withhold federal income tax, Social Security, and Medicare from employee paychecks based on their W-4 form and current tax tables, then send that money to the IRS.
- You also pay employer Social Security tax (6.2%) and employer Medicare tax (1.45%) from your own funds on every dollar of employee wages.
- Social Security tax stops at an annual wage cap (which changes yearly), but Medicare tax has no cap and applies to all wages.
- Deposit schedules are monthly or semi-weekly depending on your total payroll tax liability, and you report everything quarterly on Form 941.
- Payroll software or a payroll service handles the math for most employers, but you remain responsible for accuracy and on-time payment.
Federal income tax withholding from paychecks
Federal income tax withholding is based on two things: the employee's W-4 form and the IRS withholding tables for the current year. The W-4 tells you how many allowances the employee claims and whether they want extra withheld. The withholding tables — published by the IRS and updated annually — show you how much to withhold based on the employee's pay frequency (weekly, bi-weekly, monthly) and their filing status.
To calculate it manually, you take the employee's gross pay, subtract the standard deduction amount for their pay period (also on the IRS table), multiply the remainder by the tax rate for their bracket, then add back any tax from previous paychecks in the year if needed. In practice, you enter the gross pay and W-4 data into payroll software, and it pulls the current IRS tables and does the math. The result is the federal income tax you withhold from that paycheck and send to the IRS.
The withholding is an estimate — it is not the employee's final tax bill. When they file their tax return the following year, they may owe more or receive a refund depending on their actual income and deductions. Your job is only to withhold based on the W-4 and current tables.
Social Security and Medicare taxes (FICA)
Social Security tax is 6.2% of the employee's wages, withheld from their paycheck, plus 6.2% paid by you as the employer. The employee's portion stops once they reach the annual wage cap — in 2024 that cap is $168,600, meaning no Social Security tax is withheld on wages above that amount in a calendar year. The employer portion also stops at that same cap. Medicare tax has no cap: it is 1.45% of all wages, withheld from the employee, plus 1.45% paid by you.
There is also an additional Medicare tax of 0.9% on wages above a threshold ($200,000 for single filers, $250,000 for married filing jointly). This additional tax is withheld from the employee only, not paid by the employer. You withhold it if the employee's cumulative wages in the year exceed their threshold.
To calculate FICA for a single paycheck: multiply the gross pay by 0.062 for Social Security (if the employee has not hit the annual cap) and by 0.0145 for Medicare. Withhold both from the employee's paycheck. Then calculate the same amounts again for your employer portion — these come from your business funds, not the employee's pay. Payroll software tracks the annual wage totals and stops Social Security withholding automatically once the cap is reached.
State and local income tax withholding
Most states have an income tax, and some cities do as well. Each state publishes its own withholding tables and forms (usually called a state W-4 or equivalent). The calculation method is similar to federal: you use the employee's state W-4, the current state withholding table, and their gross pay to determine how much to withhold each pay period.
A few states have no income tax (including Texas, Florida, and Wyoming), so you withhold nothing for state income tax in those places. Some states also have no local income tax, while others allow cities to impose it. You need to know the rules for each state and city where your employees work. If an employee works in multiple states, you may need to withhold for more than one.
State and local taxes are withheld from the employee's paycheck and sent to the state or city revenue department on a schedule set by that jurisdiction — usually monthly or quarterly. You report state withholding on a state quarterly or annual return, depending on the state.
Putting it together: a sample paycheck calculation
Suppose an employee earns $2,000 in gross pay for a bi-weekly paycheck, is single, claims one allowance on their W-4, and works in a state with 5% income tax. Using 2024 IRS tables for bi-weekly pay:
| Item | Calculation | Amount |
| Gross pay | — | $2,000.00 |
| Federal income tax | From IRS table | $187.00 |
| Social Security (6.2%) | $2,000 × 0.062 | $124.00 |
| Medicare (1.45%) | $2,000 × 0.0145 | $29.00 |
| State income tax (5%) | $2,000 × 0.05 | $100.00 |
| Total withholding | — | $440.00 |
| Net pay to employee | $2,000 − $440 | $1,560.00 |
| Employer taxes (your cost, not withheld): | ||
| Employer Social Security (6.2%) | $2,000 × 0.062 | $124.00 |
| Employer Medicare (1.45%) | $2,000 × 0.0145 | $29.00 |
| Total employer tax | — | $153.00 |
The employee receives $1,560. You send $440 in withheld taxes to the IRS and state. You also pay $153 from your business account as your employer portion. The total cost to you is $2,000 in wages plus $153 in employer taxes.
Deposit schedules and reporting
You do not send withheld taxes to the IRS every payday. Instead, you deposit them on a schedule determined by your total payroll tax liability. The IRS uses a lookback period (the prior four quarters) to determine whether you are a monthly or semi-weekly depositor. Most small employers are monthly depositors, meaning you send all withheld federal income tax, Social Security, and Medicare taxes once a month, usually by the 15th of the following month.
Semi-weekly depositors must send taxes twice a week (Wednesday and Friday, depending on the payday). You move to semi-weekly status if your lookback liability exceeds $50,000. Some very large employers may be required to deposit daily.
You report all federal payroll taxes quarterly on Form 941 (Employer's Quarterly Federal Tax Return), due the last day of the month following the quarter. This form shows total wages, total withholding, and total employer taxes for the quarter. State and local taxes are reported on separate state and local forms, usually quarterly or annually depending on the jurisdiction.
Common mistakes and how to avoid them
The most common error is using outdated withholding tables or W-4 information. The IRS updates tables annually, and employees may change their W-4 mid-year. If you do not update your payroll system, you will withhold the wrong amount. Set a calendar reminder to download new IRS tables each January and process any new W-4 forms within one pay period of receipt.
Another frequent mistake is forgetting to stop Social Security withholding once an employee hits the annual wage cap. If you withhold past the cap, you must refund the employee the overage when they file their tax return, which creates a reconciliation headache. Payroll software tracks this automatically, but if you calculate manually, you must monitor cumulative wages.
Depositing late or depositing the wrong amount triggers IRS penalties. Set up automatic deposits through the IRS Electronic Federal Tax Payment System (EFTPS) or use your payroll service's built-in deposit feature so you do not miss deadlines. Keep records of every deposit and every Form 941 you file for at least three years.
Frequently Asked Questions
Do I have to use payroll software, or can I calculate taxes myself?
You can calculate manually, but it is error-prone and time-consuming. You must track IRS tables, state tables, annual wage caps, and deposit deadlines. Most small businesses use payroll software (QuickBooks Payroll, Gusto, ADP) or hire a payroll service. The cost is usually $30 to $100 per month and is worth it to avoid penalties and employee disputes.
What if I made a mistake on a paycheck and withheld too much or too little?
If you withheld too much, you can refund the employee directly or adjust future paychecks. If you withheld too little, adjust future paychecks to catch up. Either way, you must correct your Form 941 for that quarter by filing an amended return (Form 941-X). Do this as soon as you discover the error to avoid penalties.
Are there any taxes I do not have to withhold?
You do not withhold federal income tax, Social Security, or Medicare from independent contractors — they are responsible for their own taxes. You do withhold for employees. Some states allow exemptions for religious groups or specific industries, but these are rare and require documentation. When in doubt, treat the worker as an employee and withhold.
What happens if I do not deposit taxes on time?
The IRS charges a penalty based on how late the deposit is: 2% if one to five days late, 5% if six to 15 days late, 10% if more than 15 days late. You also owe interest on the unpaid amount. If you miss a deposit, contact the IRS immediately and deposit the amount owed as soon as possible. Repeated failures can result in criminal charges.
Do I have to withhold taxes for an employee who works part-time or seasonal?
Yes. The number of hours or length of employment does not matter — if someone is your employee (not a contractor), you withhold taxes on every paycheck. Seasonal employees are treated the same as full-time employees for withholding purposes.