How to Calculate Federal Tax on Monthly Salary

by W D Adkins; Updated September 26, 2017
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Salary is an alternative to hourly wages for compensating employees for work performed. The Internal Revenue Service (IRS) sets rules for calculating federal taxes on salaries. Many of the rules set out how employers can calculate how much in taxes they should withhold from employees' paychecks each month. When processing payroll, following these rules is essential. The IRS can impose penalty fees for not deducting the correct amounts.

Step 1

Compute the salary for one month by dividing the annual salary by 12. For example, if an employee’s base salary for one year is $48,000, the monthly base salary is $4,000. If the employee receives other compensation in addition to the base salary, this must be included when figuring federal tax. Do not include reimbursement for non-taxable business expenses.

Step 2

Calculate Social Security tax, which is 6.2 percent of the salary. Multiply the monthly salary by .062. As of 2010, Social Security tax is levied only on the first $106,800 of annual income, so do not deduct any further Social Security tax from earnings over this threshold.

Step 3

Figure Medicare tax, which is 1.45 percent of salary. Multiply the employee’s monthly salary by .0145. Medicare tax is levied on all income.

Step 4

Determine the amount of the employee's income on which the federal income tax must be levied. Multiply the number of withholding allowances the employee claimed on her W4 form by $304.17 (the monthly amount as of 2010), and subtract the product from the monthly salary. Also subtract other tax deductible amounts such as contributions to a 401K plan.

Step 5

Calculate federal income tax using the employee’s filing status as stated on his W4 form. For example, if an employee is single and has a taxable income of $2,500 for the month after withholding allowances are subtracted, use the tax table for single taxpayers for the current year. Thus, in 2010, the first $504 of this employee's monthly income was not taxed. The tax rate from $504 to $869 is 10 percent of the amount over $504. The rate from $869 to $3,004 per month was 15 percent. For a taxable income of $2,500, this comes out as ($869 - $504) 0.10 + ($2,500 - $869) 0.15 = $281.15. For employees with taxable income over $3,004, use the appropriate tax bracket amounts and percentage tax rate as stated in IRS Publication 15, Circular E (Employer’s Tax Guidelines) for the current year.

Tips

  • In general, if a salary is greater than $23,600 per year, the employee’s pay may be exempt from minimum wage and overtime requirements, although this is not always the case. The exempt or non-exempt status of a monthly salary does not affect calculation of federal taxes.

    The employer must pay Social Security and Medicare taxes equal to the amount the employee pays.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

Photo Credits

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