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How QuickBooks calculates payroll taxes

SOLVEDby QuickBooksQuickBooks Desktop Payroll10Updated April 22, 2021

Learn how QuickBooks calculates taxes to understand the tax amounts reported on an employee's paycheck or the year-to-date (YTD) payroll report.

  • Payroll wage and tax calculations in QuickBooks are derived from the payroll data and transactions you entered. For QuickBooks to properly calculate correct wages and tax amounts, your employees and payroll items should be set up correctly.
  • It is a recommended practice to run payroll reports on regular basis to review your employees' payroll data so you can catch mistakes before the tax filing season.
  • You can use the Payroll Detail Review Report (go to the Reports menu, then select Employees & Payroll > Payroll Detail Review) to verify your employees' year-to-date (YTD) wage and tax calculations. To fix calculation errors, check the Related Articles section.
QuickBooks Calculation MethodWhat you may see
QuickBoooks uses the more accurate percentage method and tax tables that are annualized (rather than weekly, biweekly, or monthly).

It also calculates your payroll taxes on year-to-date amount instead of per transaction.

QuickBooks may enter correcting adjustment amounts on the next paycheck if the employee was under or over collected on flat-rate taxes.

You may notice differences between calculations by QuickBooks and printed wage bracket taxes from agency publications. Both methods are correct and acceptable to the agency.

See IRS Pub 15 for FIT Withholding tables.

For the State Withholding calculation table, check your State Agency's calculation method.

The tax table:
  • automatically adjusts many flat-rate taxes.Examples:
    • Social Security
    • Medicare (for Additional Medicare tax, check the User Guide for QuickBooks)
    • Federal Unemployment (FUTA)
    • State Unemployment (SUI - wage base limit only, SUI rate is unique to your business)
    • State Disability (except for HI and NY)
    • Predefined local taxes
  • handles rounding discrepancies and retroactive tax rate changes for flat-rate taxes including FICA, FUTA, SUI, and SDI taxes (some SDI taxes are flat-rate).

Non-retroactive tax rate changes aren't adjusted.

It also determines the rates and wage limits for Federal, State, and rate-defined local taxes.

QuickBooks stops collecting tax amounts when employee reaches the wage base limit for that tax item.

Additional Medicare starts calculating on paycheck, only after the employee has reached $200,000 in wages for the current year.

Employee who has reached wage base limit will show amount of &0.00 on paycheck for that tax item.

Example: FUTA wage base limit is 7,000/year. Employee wages in excess of 7,000 will show $0.00 amount for FUTA on paycheck.

Federal and State Income Tax (FIT and SIT) amount calculations are determined by the following:

  • agency's wage and tax calculation table
  • employee's filing status, number of allowances, or extra withholding amount in the employee setup
  • pre-tax deduction items included on the paycheck
  • changes in pay frequency (creating extra paycheck outside of normal pay schedule)
  • creating a paycheck with wages that has lesser or larger amount than what the employee normally gets in a pay period

Additional Medicare starts calculating on paycheck only after the employee has reached $200,000.00 in wages for the current year. You need to ensure that your employees are setup for this item in the employee profile for Medicare Employee Addl Tax to calculate correctly once the employee reached the Medicare limit.

Having a 0 amount or a different amount than usual on a paycheck doesn't always indicate erroneous calculation. More often than not, it is because QuickBooks Desktop is just working as designed. Below are some examples of these Special Calculation situations which you may encounter when creating the paychecks.

  • Annualized salary exceeds the salary limit - If the gross wage of the employee is too high and exceeds the limit in QuickBooks Desktop, FIT and SIT won't automatically calculate. When this happens:
    1. Verify if the wage in the employee's paycheck is correct by checking the Earnings section of the paycheck details.
    2. If the wage is correct, calculate the FIT and SIT manually and enter the resulting amounts in the paycheck details.
    3. If the wage is incorrect, adjust the employees' salary or hourly rate from the employee information section.
      1. Go to the Employees menu, then select Employee Center.
      2. Double-click on the employee's name.
      3. Go to the Payroll Info tab.
      4. Under the Earnings section, enter the correct Hourly/Annual rate of the employee.
  • The gross wage of the employee is too low - When the employee's wage is low enough, it's possible that the correct calculation of the FIT and SIT is zero. Refer to Publication 15, Circular E, Employer's Tax Guide to verify the accuracy of the FIT and SIT calculation.

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