How to Calculate Payroll Taxes Manually: Withholding, FICA, and Net Pay

To calculate payroll taxes manually, you work through a fixed sequence for each employee’s pay period: gross wages, then pre-tax deductions, then federal income tax withholding from the IRS tables, then Social Security at 6.2% and Medicare at 1.45%, then any state taxes. On top of what you withhold from the check, you owe a matching 6.2% and 1.45% out of your own pocket, plus federal and state unemployment tax. The math is not hard once the order is clear, but the order matters, and so does knowing which deductions come out before which taxes.

Gather Your Inputs Before You Start

Two employee documents drive every calculation. The W-4 gives you the employee’s filing status, whether they checked the multiple-jobs box, and any dollar amounts they entered for dependents, other income, or extra withholding. Form I-9 confirms work authorization and has to be on file for every employee.¹

You also need two IRS publications for the current year. Publication 15 (Circular E) covers deposit rules, wage definitions, and supplemental pay. Publication 15-T contains the withholding tables you’ll actually look up numbers in.² Then pull your pay-period hours for hourly staff, the pay frequency you’ve set (weekly, biweekly, semimonthly, or monthly), and each employee’s benefit elections.

Step 1: Calculate Gross Wages

Gross pay is what the employee earns before anything comes out. For an hourly worker, multiply hours by rate. Someone at $20 an hour who works 40 hours has $800 in gross wages. For a salaried worker, divide the annual salary by the number of pay periods. A $52,000 salary paid biweekly is $2,000 per period ($52,000 ÷ 26).

Overtime is where hourly gross wages get bigger. Federal law requires one and a half times the regular rate for hours over 40 in a workweek.³ The $20-an-hour employee who works 45 hours earns $800 for the first 40 and $150 for the next five at $30 an hour, for $950 gross.

Non-discretionary bonuses and commissions count as gross wages too. A non-discretionary bonus (one tied to hitting a target or working a specific shift, not one you hand out on a whim) has to be folded into the regular rate when you recompute overtime for the period the bonus covers. Flag those payments before you run the numbers.

Step 2: Subtract Pre-Tax Deductions in the Right Order

This is where most manual payroll mistakes happen, because not every pre-tax deduction reduces every tax.

Health insurance premiums run through a Section 125 cafeteria plan reduce wages for federal income tax, Social Security, Medicare, and federal unemployment tax purposes. They come out before any of those taxes get calculated.⁴

Traditional 401(k) contributions do not work the same way. They reduce wages for federal income tax withholding, but they do not reduce wages for Social Security or Medicare.⁵ So you end up carrying two wage figures through the calculation: a lower number for federal income tax and a higher number (that still includes the 401(k) deferral) for FICA.

Step 3: Look Up Federal Income Tax Withholding

Publication 15-T gives you two ways to determine the federal income tax to withhold: the wage bracket method and the percentage method.²

The wage bracket method is simpler. Find the table matching the employee’s pay frequency and filing status, locate the row for their adjusted wages, and read off the withholding amount. The percentage method uses a formula with tax brackets and handles wages that fall outside the wage bracket tables. Either method produces the same result. Pick whichever is easier to run for your headcount.

Supplemental Wages

Bonuses, commissions, overtime premiums paid separately, and similar supplemental wages can be withheld at a flat 22% for federal income tax if you pay them separately from regular wages or identify them separately on the same check.⁶ The flat rate is faster. You can also combine supplemental and regular wages, withhold as if it were one regular payment, and subtract what you already withheld on the regular portion.

Once an employee receives more than $1 million in supplemental wages during the calendar year, the excess above $1 million must be withheld at 37%, regardless of the W-4.⁶

Step 4: Apply Social Security and Medicare

Together, Social Security and Medicare are FICA. Both are flat percentages of wages, applied after any Section 125 deduction but before the 401(k) deferral is subtracted.

Social Security: 6.2%

Withhold 6.2% of wages for Social Security.⁷ On $1,000, that’s $62. The tax only runs up to the annual wage base, which is $184,500 for 2026.⁸ Once an employee’s year-to-date wages hit that ceiling, you stop. The maximum an employee (or employer) contributes in 2026 is $11,439.

Medicare: 1.45%, No Cap

Withhold 1.45% of all wages for Medicare, with no wage ceiling.⁷ On $1,000, that’s $14.50. Every dollar all year.

An Additional Medicare Tax of 0.9% applies once an employee’s wages pass $200,000 for the year. Begin withholding the extra 0.9% on wages above that threshold, and do so regardless of the employee’s filing status.⁹ Above $200,000 a high earner pays 2.35% in Medicare tax (1.45% plus 0.9%). There is no employer match on the additional 0.9%.

Step 5: Add Your Employer-Side Taxes

Everything above is what comes out of the employee’s paycheck. You also owe your own payroll taxes on top of that, from company funds.

The FICA Match

You pay 6.2% for Social Security and 1.45% for Medicare on the same wage base you used for the employee.¹⁰ The $184,500 Social Security cap applies to your share as well. You do not match the 0.9% Additional Medicare Tax.

Federal Unemployment (FUTA)

FUTA is employer-only, at 6.0% on the first $7,000 each employee earns during the year.¹¹¹² Pay your state unemployment tax on time and your state is in good standing, and you get a credit of up to 5.4%, dropping your effective FUTA rate to 0.6%.¹³ At 0.6%, FUTA caps at $42 per employee for the year.

If your state has borrowed from the federal unemployment trust fund and hasn’t repaid on time, the credit shrinks by 0.3% for each year the debt is outstanding, raising your effective FUTA rate. Check the IRS credit reduction state list before filing Form 940.¹⁴

State Taxes

Every state runs its own unemployment insurance program with its own tax rate and wage base. State wage bases range from $7,000 to over $78,000, and your rate depends on your industry and claims history. New employers get a default rate until they build enough experience. Some states also require payroll deductions for disability insurance or paid family leave. Most states also require withholding state income tax from wages using their own tables and forms; a handful have no personal income tax on wages. Confirm rates and wage bases with your state labor and revenue agencies.

Step 6: Arrive at Net Pay

Net pay is what the employee actually takes home. Start with gross wages and subtract in this order:

Pre-tax deductions the employee elected (Section 125 health premiums, traditional 401(k), HSA).
Federal income tax withholding, from the wage bracket or percentage method.
Social Security tax, 6.2% of FICA-taxable wages, up to the $184,500 annual cap.
Medicare tax, 1.45% of all FICA-taxable wages, plus 0.9% on year-to-date wages above $200,000.
State and local taxes, whatever your state requires.
Involuntary deductions such as court-ordered garnishments and tax levies.
Post-tax voluntary deductions like Roth 401(k), union dues, or other after-tax items the employee has authorized in writing.

Federal law caps garnishment for consumer debt at the lesser of 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage.¹⁵ Child support and tax levies use separate, higher limits. Disposable earnings here means what remains after legally required deductions (taxes), not gross pay.

A quick example. An employee with $2,000 in gross biweekly wages, $100 in Section 125 health premiums, $150 in 401(k) deferrals, $177 in federal income tax, $117.80 in Social Security tax (6.2% of $1,900 after Section 125), and $27.55 in Medicare tax (1.45% of $1,900) takes home roughly $1,427.65 before any state taxes. Log each line separately in your payroll journal. That is how everything reconciles at quarter-end.

Deposit and File on Schedule

Correct math does not save you if the deposit is late. The IRS assigns you a monthly or semiweekly deposit schedule based on your total employment tax liability during a lookback period. For 2026 Form 941 filers, the lookback period runs July 1, 2024, through June 30, 2025.⁶

Monthly depositor: $50,000 or less reported during the lookback period. Deposit each month’s taxes by the 15th of the next month.
Semiweekly depositor: more than $50,000. Deposit Wednesday-through-Friday payday taxes by the following Wednesday, and Saturday-through-Tuesday payday taxes by the following Friday.
New employer: you start as monthly, because your lookback-period liability counts as zero.

Hit $100,000 or more in tax liability on any single day and you must deposit by the next business day. You also become a semiweekly depositor for the rest of that year and the next.⁶

Most employers file Form 941 quarterly, due April 30, July 31, October 31, and January 31.¹⁶ Very small employers with $1,000 or less in total annual liability may qualify to file Form 944 once a year instead.¹⁷ W-2s go to employees and the Social Security Administration by January 31 of the following year.¹⁸ Keep employment tax records for at least four years after filing the fourth-quarter return.¹⁹

What Late Deposits Cost

The IRS charges failure-to-deposit penalties on a tiered scale, and the tiers replace each other rather than stack. One to five days late is 2% of the unpaid amount; six to fifteen days is 5%; more than fifteen days is 10%; more than ten days after the first IRS notice is 15%.²⁰

The bigger risk sits behind the tiers. Federal income tax and the employee’s share of FICA are trust fund taxes, because you are holding the employee’s money until you remit it. Willfully fail to deposit those funds, and the IRS can assess a trust fund recovery penalty equal to 100% of the unpaid trust fund tax against any person responsible for the decision, personally.²¹ The penalty reaches individual owners, officers, and anyone with authority over company finances, and it is the single largest payroll compliance risk a small business carries. Getting each pay period right, on time, is what keeps that penalty theoretical.

1
U.S. Citizenship and Immigration Services. Completing Form I-9
2
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
3
Office of the Law Revision Counsel. 29 U.S.C. 207 – Maximum Hours
4
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
5
Internal Revenue Service. 401(k) Plan Overview
6
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
7
Office of the Law Revision Counsel. 26 U.S.C. 3101 – Rate of Tax
8
Social Security Administration. Contribution and Benefit Base
9
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
10
Social Security Administration. What Are FICA and SECA Taxes?
11
Office of the Law Revision Counsel. 26 U.S.C. 3301 – Rate of Tax
12
Office of the Law Revision Counsel. 26 U.S.C. 3306 – Definitions
13
Office of the Law Revision Counsel. 26 U.S.C. 3302 – Credits Against Tax
14
Internal Revenue Service. FUTA Credit Reduction
15
Office of the Law Revision Counsel. 15 U.S.C. 1673 – Restriction on Garnishment
16
Internal Revenue Service. Instructions for Form 941
17
Internal Revenue Service. About Form 944, Employer’s Annual Federal Tax Return
18
Social Security Administration. Deadline Dates to File W-2s
19
Internal Revenue Service. Employment Tax Recordkeeping
20
Internal Revenue Service. Failure to Deposit Penalty
21
Internal Revenue Service. Trust Fund Recovery Penalty