Understanding Payroll: Step-by-Step Guide to Calculating Payroll Taxes and Reporting FICA

Managing payroll is one of the most critical, complex, and compliance-driven tasks for any business—especially when your team spans multiple countries. Whether you’re a business leader building a global workforce or an HR professional seeking to avoid costly errors, understanding how to calculate payroll taxes and report FICA is essential. In this guide, you’ll learn the fundamentals of payroll, the step-by-step process for calculating payroll taxes, and how Ontop’s global payroll solutions can help you stay compliant and efficient.

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Key Takeaways

Payroll is the process of compensating employees, including calculating and withholding taxes, and reporting to government agencies.
Calculating payroll taxes involves determining gross pay, applying pre-tax deductions, withholding FICA and income taxes, and accounting for voluntary deductions.
FICA taxes fund Social Security and Medicare, with both employers and employees contributing.
Compliance with local, state, and federal regulations is mandatory and can be complex, especially for global teams.
Ontop offers a centralized, compliant, and efficient solution for managing payroll and HR across 150+ countries.

What Is Payroll?

Payroll refers to the compensation a business pays its employees for a set period or on a given date. It’s more than just writing checks—it’s a process that includes tracking hours, calculating pay, withholding taxes, and ensuring compliance with local and international regulations. Payroll is typically managed by HR or accounting departments, but many businesses now use specialized payroll services or software to handle these tasks[1].

Payroll is a major business expense and is almost always tax-deductible, reducing a company’s taxable income. The process can vary from one pay period to another due to overtime, bonuses, or sick pay.

How Payroll Works: The Essentials

Payroll Components

Gross Pay: Total earnings before deductions.
Pre-Tax Deductions: Items like retirement contributions or health insurance.
Payroll Taxes: Includes FICA (Social Security and Medicare), federal, state, and local taxes.
Voluntary Deductions: Items such as union dues or wage garnishments.
Net Pay: The amount employees take home after all deductions.

Why Payroll Is Complex

Payroll must comply with a range of regulations, including the Fair Labor Standards Act (FLSA) in the US, which sets rules for minimum wage, overtime, and child labor. For global teams, compliance extends to each country’s unique labor laws and tax codes[1].

Step-by-Step Guide: Calculating Payroll Taxes and Reporting FICA

Accurate payroll tax calculation is crucial for compliance and employee trust. Here’s a clear, actionable process:

1. Determine Employee’s Gross Wages

Hourly Employees: Multiply hours worked by hourly rate.
Salaried Employees: Divide annual salary by the number of pay periods.

Example: An employee earning $50,000 annually, paid biweekly (26 pay periods), receives $1,923.08 per pay period[1].

2. Apply Pre-Tax Deductions

Subtract pre-tax deductions such as 401(k) contributions, health insurance, or HSA/FSA contributions from gross pay[1].

3. Calculate and Withhold Payroll Taxes

FICA Taxes

Social Security: 6.2% of gross pay (up to the annual wage base limit)
Medicare: 1.45% of gross pay

Employers must match these contributions, resulting in a total of 15.3% for Social Security and Medicare combined[1][3].

Federal Income Tax

Use the employee’s Form W-4 and IRS tax tables to determine withholding[2][3][4].

4. Deduct Voluntary Deductions

After taxes, subtract any voluntary deductions such as Roth 401(k) contributions, life insurance, or union dues[1].

5. Calculate Net Pay

The remaining amount is the employee’s take-home pay.

6. Report and Remit Taxes

File IRS Form 941 quarterly to report federal income tax, Social Security, and Medicare withholdings[1][3]. Remit both employee and employer FICA contributions to the IRS.

Special Considerations for Global Payroll

Managing payroll for international teams introduces additional complexity:

Multiple Currencies: Payroll must account for exchange rates and local currency regulations.
Local Compliance: Each country has unique tax laws, reporting requirements, and employment standards.
Contractor vs. Employee Classification: Misclassification can result in penalties.

Global payroll solutions like Ontop help businesses avoid entity setup, manage compliance documentation, and pay workers instantly in over 150 countries, all while offering financial benefits such as the Ontop Visa card and global money movement capabilities.

Professional Payroll Services vs. Payroll Software

Criteria	Professional Payroll Service	Payroll Software	Ontop's Global Solution
Compliance Management	High	Varies	High, multi-country
Cost	Higher	Lower	Flexible, scalable
Reporting	Extensive	Standard	Centralized, real-time
Global Capabilities	Limited	Limited	150+ countries, instant USD pay
User Experience	Outsourced	In-house	Centralized, user-friendly

Ontop stands out by combining the compliance and reporting strengths of professional services with the flexibility and scalability of cloud-based software, tailored for global teams.

Why Ontop Is the Trusted Choice for Global Payroll

Ontop provides a centralized platform for global payroll, HR, and compliance, enabling businesses to:

Hire and pay international talent compliantly, without setting up local entities.
Manage contracts, documentation, and instant payments in over 150 countries.
Offer workers financial benefits, including the Ontop Visa card and seamless global money movement.
Access real-time reporting and compliance support, reducing risk and administrative burden.

For businesses seeking Deel alternatives, top PEO platforms, or a reliable international contractor payment platform, Ontop delivers a comprehensive solution that simplifies global workforce management.

Frequently Asked Questions

What is FICA and why is it important?
FICA stands for the Federal Insurance Contributions Act. It requires employers and employees to contribute to Social Security and Medicare, funding retirement and healthcare benefits for millions of Americans[1][3].

How do I calculate payroll taxes for remote or international employees?
Payroll taxes for remote or international employees depend on their location, employment status, and local laws. Using a global payroll solution like Ontop helps you stay compliant across jurisdictions.

What happens if payroll taxes are calculated incorrectly?
Incorrect payroll tax calculations can result in penalties, interest, and compliance issues. Automated solutions and professional services help reduce these risks[1].

Is payroll part of HR or accounting?
Payroll is often managed by HR but involves significant accounting functions, especially for tax reporting and compliance[1].

How does Ontop help with global payroll compliance?
Ontop centralizes payroll, compliance documentation, and payments, ensuring businesses meet local and international requirements without the need for local entity setup.

For more insights on building a global workforce strategy or managing remote teams, explore Ontop’s global payroll solutions and compliance resources.