Running your own business can be rewarding, both emotionally and financially, but it comes with many responsibilities. One of these is more complicated tax obligations. In addition to doing taxes for your business, you'll be responsible for handling state and federal payroll taxes for your employees, both full and part time. Figuring out what this includes can be tricky. Here are some guidelines to help you get it right.

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Determining the Required Amount for Withholding

As an employer, you are required by law or statute to withhold a number of required tax payments from your employees’ paychecks. These include federal income tax, Social Security, Medicare, and state income taxes, as well as any applicable local taxes. Local taxes may include disability and unemployment insurance, depending on your state and city. These withholdings are mandatory; they must be taken out regardless of whether the employee wants the deductions taken out or not.

At the federal level, the amount of withholding required depends on the employee’s income and deductions. When you hire a new employee, ask him or her to  complete the IRS W4 form, which tells you how much to withhold. You can see IRS Publication 15 to find out more about federal income tax rates and withholding requirements. In addition to federal income tax withholding, you must also retain 6 percent of the employee’s gross income for Social Security taxes and 1.45 percent for Medicare. (As an employer, you will be required to match those amounts from your business’s funds.) Withholding rates for both Social Security and Medicare change for high-income employees; for instance, Medicare withholding climbs to 2.35 percent for those earning more than $200,000. Consult the latest IRS publications for specific guidelines.

State and local withholding requirements vary widely. Generally, you can learn about these requirements from your state and local revenue agencies. Visit the agency or search online to get the most recent information and any required forms.

Taken together, the required withholding for federal, state, and local taxes plus Social Security and Medicare constitutes the amount that must legally be kept back from the employee’s pay. You’ll pay the required funds, plus your share of the employee’s Social Security and Medicare taxes, to the appropriate taxing agencies (the IRS for federal income tax, Social Security, and Medicare; the state or local agency for other taxes).

Calculating Net Pay

To calculate an employee’s net pay, begin with his or her gross pay—either the negotiated hourly pay rate multiplied by the hours worked or the portion of the agreed salary applying to the pay period. Then, deduct the required payroll deductions, based on the employee’s gross pay. These funds will be forwarded to the appropriate federal, state, or local taxing agencies. Finally, take into account voluntary deductions, for benefits such as health or life insurance, retirement contributions, or other optional items the employee has selected. These funds will be paid out to the insurance carrier, retirement plan, or other organization, as appropriate. The remaining amount is the employee’s net pay—the amount that should appear on the paycheck. You'll have to repeat these calculations for each employee.

For more help managing employees, see our Employer Center.

Get started Ask a Lawyer a Question You'll hear back in one business day.

Get started Ask a Lawyer a Question You'll hear back in one business day.