Every business needs to submit their payroll taxes to the government. Even a home based business also has to submit the tax. In most of the cases, business owners contact payroll companies or call a payroll specialist to do the needful for them. However, if it very important to understand how to calculate the payroll taxes. This process helps you to monitor the outsourcing companies as well.

To fill the taxes, the items which you require are:

• IRS Publication 15, Circular E
• Instruction manual of state payroll tax
• W4 forms

Once, you have collected all the above said items, you need to follow couple of steps which are mentioned below:

• Calculate each employee’s gross pay. Include everything in it like commission, paid meal vouchers, tips etc. Make sure that you do not include the reimbursement for business expenditure in this.

• After determining the gross pay, multiply the number of withholding allowances the employee has claimed on his w4 form. Now subtract this amount from the gross wages. In addition, you must subtract any tax deductions, such as retirement planning etc.

• The company also needs to calculate the deferral income tax which needs to be withheld. There are tax brackets which are given by federal tax department, you need to follow them in order to see which slabs you will be liable for.

• Do not forget to figure out if there is still any local or state level tax which needs to be withheld. Each state has different rule and formulas to determine them. You need to obtain the instruction form at the local state level as well.

• Calculate the amount of social security and Medicare taxes. You also need to deduct the same from employee’s paycheck. They both are known as flat rate taxes. However, if the employee’s income has passed the annual income threshold, there is no need to deduct the social security tax.

• There are some federal and state unemployment taxes as well (FUTA & SUTA). These are employer paid taxes. First you have to calculate SUTA tax, in which you should consult the tax rules of your state. FUTA tax is 6.2% of the first $7,000 of an employee wages.

• Once you consider all the above said things, it’s time for you to check the deadline. It is very vital to always pay your taxes on time to avoid penalty.

• For the better relationship with your employees, you can also discuss and explain them their tax deductions, their savings etc. It will help them to understand their taxes and it will also bring transparency in the relationship you have with your employees.

Some of the big companies, also conduct regular session with their employees in order to give education to them about how to save their taxes, what saving they can do which will help their family and themselves in later stages. This is a very healthy practice and it gives lots of motivation to employees.

However, we must conclude that if you are a small business house it will be better for you to outsource your payroll processing to some other company. Keeping an in house accountant or doing all the payroll yourself can create a hassle for you.

Author's Bio: 

Author of this article is a person who has very strong knowledge about payroll processing services. He understands all the latest trends including work opportunity tax credit and human capital management.