Payroll costs are the eligible expenses a business owner pays for his employees. There are two kinds of expenses. The first one is to be deducted from employees’ wages, whereas the second type is only subjected to the employer, like taxes.
Withholding Taxes
Withholding taxes entirely depend on your employee. When your employee submits a W4 form, you can easily calculate the taxes you need to withhold.
The standard withholding taxes are:
- FICA (Medicare and Social Security)
- Federal Income Taxes (FIT)
- State Income Tax (SIT)
Benefits Withholdings
If you are deducting the employee’s share of the benefits from their actual pay. Then, you have to make any arrangement to pay something equivalent too.
Withholding benefits are employee benefits that vary from organization to organization. Examples of withholding benefits are:
- Life insurance
- Commuter benefits
- Employee Health insurance
- Retirement plans
- Loan disbursement
- Expense for rental
Employer’s Payroll Tax Expenses
Payroll taxes are not too high. For example, the Federal Unemployment Tax of any employee is 6% of the $7,000 gross income that an employee gets. The major payroll tax expenses are:
- FICA (Medicare and Social Security)
- FUTA (Federal Unemployment Taxes)
- SUTA (State Unemployment Taxes)
Payroll Expenses for Contractors
The major difference between contractors and employees is that contractors pay their own taxes, whereas you are responsible for your employees’ taxes. You only have to pay the gross pay to the contractor, and he will have to deal with all the tax-related stuff.
How to Calculate Payroll Expenses
1. Employees Should Complete the W4-Form
The W4 form is the key to tax withholding. It is mandatory for new employees to complete the W4 form before they enter the payroll cycle.
2. Define the Payroll Period
A business owner should properly define the payroll period. It can be weekly or even quarterly.
3. Using Gross Pay and Deductions for Calculating Net Pay
The withholding taxes can be deducted by having complete information about the gross employee pay. After that, you can get an accurate idea of employee wages.
4. Creating a Payroll Journal Entry for All Taxes
Now is the accurate time to calculate all your contributions. It includes the taxable income from employees’ wages that you calculated before. Payroll software will save you from any trouble at this stage.
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