How to Calculate Payroll for a Retail Business

Retail business owners who hire employees are required to withhold payroll taxes. When you withhold payroll taxes, you must withhold and pay a portion of each employee's check to cover federal income and FICA taxes. FICA, or the Federal Insurance Contributions Act, includes Medicare and Social Security taxes. To calculate payroll amounts for your retail employees, you must know each employee's withholding rate, number of withholding allowances and the current tax rates from Circular E.

Form W-4

  1. When you hire a new employee, you must present the new hire with a Form W-4, or the Employee's Withholding Allowance Certificate. Form W-4 assists the employee with determining the appropriate withholding rate for federal income tax purposes. In conjunction with Circular E, employers must use the information on Form W-4 to calculate income tax withholdings.

FICA Taxes

  1. As of 2013, the Social Security tax rate is 6.2 percent of the initial $113,700 of employee's earnings. The Medicare tax rate is 1.45 percent of each employee's total earnings. For example, if an employee earns $2,000 in a pay period, multiply $2,000 by 6.2 percent to determine the employee's Social Security tax, which is $124. Multiply $2,000 by 1.45 percent to determine the employee's Medicare tax, which is $29. Write these numbers down.

Determining Taxable Income

  1. The Internal Revenue Service allows an employee to earn a certain amount before taxing his income, which is known as a withholding allowance. The amount an employee can earn is determined by the allowances claimed on Form W-4 and the current withholding allowance rate. To calculate an employee's withholding allowance, look at the number of allowances claimed on Form W-4. Multiply this number by the current withholding allowance rate, which is listed in the "Percentage Method" table on Circular E. For example, as of 2013, the withholding allowance rate for an employee paid weekly is $75. If an employee claimed four allowances, his withholding allowance is $300, or $75 times 4. Subtract this amount from the employee's wages to determine his taxable income. If an employee earned $2,000, his taxable income is $1,700, or $2,000 minus $300.

Federal Income Taxes

  1. Form W-4 also contains an employee's withholding rate, which is single, married or married, but withhold at the single rate. Look on Form W-4 for the employee's desired withholding rate and refer to the "Percentage Method Table for Income Tax Withholdings" included in Circular E. Locate the table that matches the employee's payroll period and the column that corresponds with the employee's desired tax rate. Find the row that includes the employee's taxable income. For example, if an employee is paid weekly, claimed the married tax rate and has a taxable income of $1,700, the tax rate for this employee is a base tax of $191.95 plus 25 percent of excess over $1,554. Subtract the excess amount from the employee's taxable income, or $1,700 minus $1,554, which is $146. Multiply the remaining amount by the tax percentage, or $146 times 25 percent, which is $36.50. Add this amount to the base tax to determine the employee's federal income taxes. Using the previous example, the employee's federal income taxes are $228.45, or $191.95 plus $36.50.

Calculating the Employee's Payroll Taxes

  1. An employee's paycheck is his wages minus FICA and federal income taxes. Using the previous example, if an employee's wages are $2,000, subtract the $124 Social Security tax, the $29 Medicare tax and the $228.45 federal income taxes from his wages to determine his paycheck, which is $1,618.55. Write out the employee's payroll check for this amount.

State and Local Taxes

  1. Most states, except Alaska, Texas, Washington, Tennessee, New Hampshire, Wyoming, Florida, Nevada and South Dakota also withhold state income taxes and some municipalities withhold local taxes. Contact your state's department of revenue or local treasurer's office to determine the proper procedure for withholding state and local taxes.