Each payday, the size of your paycheck is reduced by the taxes that are deducted. The Internal Revenue Service (IRS) requires your employer to deduct your estimated tax so you don't have to pay the whole thing on April 15. Plus, this way the IRS gets the money sooner. There are actually several taxes. This makes it a little complicated to calculate salary tax, but each individual tax calculation is fairly simple.

Preliminary Steps

To calculate salary tax, you'll need the number of withholding allowances you claimed on your W-4 form. In addition, get a copy of IRS Publication 15, Circular E (see References) and the amounts of any tax-deductible items such as contributions to a tax-deferred retirement plan. Next, figure your gross wages. If you are paid a fixed salary, this is simply the portion of your annual salary you get each pay period. If your salary is based on an hourly wages, multiply the hours worked by your hourly rate. Multiply overtime hours by 1.5 times the hourly wage. Add any other taxable compensation such as sales commissions and tips.

Social Security and Medicare

Social Security tax is calculated at 6.2 percent of your gross wages. There is an upper earnings limit that changes from year to year (in 2009, for example, the limit was $106,800). If your earnings for the year have reached the limit, no further Social Security tax is deducted. Medicare tax is figured as 1.45 percent of your gross wages. There is no upper earnings limit, so you pay this tax on everything you earn.

Federal Income Tax

Some of your gross wages are exempt from federal income tax. To figure out how much, multiply the number of withholding allowances by the amount of one allowance for the pay period your employer uses. For example, in 2009 the amount for a biweekly pay period was $140.38. If you have claimed two allowances, subtract $280.76 from your gross wages. Next, subtract any tax exemptions such as payments into a 401K plan. The result is your federal taxable income. Federal income tax isn't a flat-rate tax like Social Security/Medicare. Instead, it's set up as a series of tax brackets, each with a different percentage. Look in IRS Publication 15, Circular E, for the current year at the tax table that applies to you. For example, suppose you are single and paid biweekly. Use that tax table. If your federal taxable income for the pay period is $800, there is no tax on the first $102. Earnings from $102 to $400 are taxed at 10 percent (this equals $29.80). The remaining $400 is taxed at 15 percent ($60.00). Add the amounts together to find the total federal income tax ($29.00 + $60.00 = $89.80).

Other Taxes

Most states and many municipalities levy income taxes in addition to the federal taxes you pay. The formulas for these taxes are set by the state/municipal government. You can order instruction booklets from your state/local department of revenue or taxation.

Source:

IRS Pub. 15, Circular E: Employer Tax Guidelines

Social Security Tax Information

Payroll Tax Guidelines