How to Calculate Federal Tax Withheld for Hourly Employees

by Tara Kimball Google

Federal income tax withholding is a standard deduction from employee payroll. As a business owner, proper calculation of tax withholding is essential to avoid the risk of substantial penalties from the Internal Revenue Service. Withholding percentages vary each year, making it important that you verify the current withholding percentages for each tax at the start of each calendar year.

1. Calculate gross pay for each of your employees. Multiply the number of hours worked by the hourly rate. For example, an employee earning $15 per hour that worked 38 hours this week would earn a gross pay of $570.

2. Check the W-4 that each employee submitted to determine how many exemptions he claimed. Multiply $71 by the total number of exemptions. If an employee claimed three exemptions, reduce his gross pay by $213 to determine that the income subject to withholding equals $357.

3. Locate the pay cycle that fits your payroll cycle. For example, weekly, biweekly, or semimonthly. Locate the pay range that fits your employees' earnings subject to federal withholding. In this case, if an employee is married with an income that meets the $152 to $479 range, you withhold 10 percent of all earnings over $152. In this example, the withholding would equal $20.50.

4. Calculate the Social Security withholding. If an employee has made less than $108,600 year-to-date, calculate Social Security tax withholding at 4.2 percent on the gross pay as of 2011. In this example, withhold $23.94 in Social Security taxes. Verify the rate with the Social Security Administration annually.

5. Determine the Medicare withholding based on the gross pay. As of 2011, the Medicare withholding rate is 1.45 percent. In the example here, the employee is subject to $8.26 in Medicare tax withholding.

6. Reduce the gross pay by the tax withholding to reach the net pay that is issued to your employees. For the calculations represented here, an employee's net pay equals $517.30.

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