How Are Payroll Taxes Calculated and Withheld Each Pay Period?
Payroll taxes are one of the most important and sometimes most confusing parts of payroll. While many people assume taxes are based on gross pay, the reality is more detailed. Understanding how taxes are calculated and withheld each pay period helps both employers and employees stay informed and compliant.
What Are Payroll Taxes Based On?
The first step is calculating an employee’s taxable wage base. This is not the same as gross wages. Pre-tax deductions like retirement contributions, health insurance, or dental insurance reduce the amount of wages subject to Federal, State, Social Security, and Medicare taxes. Once these deductions are applied, the remaining amount is used to calculate required payroll taxes.
Statutory Taxes Employers and Employees Pay
Every paycheck includes required statutory taxes:
Social Security and Medicare (FICA): Employees pay 7.65% of their taxable wages, and employers match that amount. Social Security has an annual cap, while Medicare applies additional withholding above certain income levels.
Unemployment Taxes: Employers are also responsible for both federal and state unemployment taxes. Federal unemployment applies to the first $7,000 of wages per employee. In Virginia, state unemployment applies to the first $8,000. State rates vary and are based on an employer’s “experience rating,” which compares taxes paid in against benefits paid out.
It’s important to note that when employees switch employers mid-year, wage base limits reset, which can result in additional withholdings. Employees may receive a credit for overpayments when filing their annual tax return, but employers do not.
How Employees Can Review Accuracy
Even when employers calculate everything correctly, employees may want to adjust their withholdings. Options include:
Using the IRS.gov online withholding tool for step-by-step guidance.
Reviewing past tax returns to see if adjustments are needed.
Consulting with a tax preparer to align withholding with personal tax goals.
Employees can also request extra withholding by asking their employer or payroll provider to apply a flat amount or additional percentage each pay period.
Why Accuracy Matters
Accurate payroll tax calculations protect businesses from penalties and ensure employees meet their tax obligations without surprises at year-end. Errors can lead to audits, added costs, and frustration for both employers and employees.
If you have questions about how payroll taxes work or want to explore payroll solutions that keep your business accurate and compliant, visit our website or connect with our team directly. Our affordability calculator makes it simple to get a personalized payroll quote.
Your payroll should give you peace of mind—calculated correctly, filed on time, and always accurate. Let’s make that happen together.
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