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1.

Multiply the current FICA tax rate expressed as a decimal by the employee's earnings. As of 2010, the rate is 7.65 percent: 1.45 for Medicare taxes and 6.2 percent for Social Security taxes. For example, if an employee earned $2,900 per month, you would multiply $2,900 by 0.0765 to find that you would need to withhold $221.85 for FICA taxes. You can find the current FICA tax rates and any future changes through the Social Security Administration or IRS Publication 15.

2.

Consult the employee's W-4 form to determine how many allowances the employee claimed.

3.

Multiply the number of allowances claimed by the value of those allowances. The value adjusts annually and for 2010 each allowance is equal to $3,650. If the employee claims only one allowance the total allowance for the year 2010 would be $3650. The value for future years can be found in IRS Publication 15.

4.

Divide the value of the allowances by the number of paychecks over the course of a year to determine a pay period value. Continuing the example, if your employees are paid on a monthly basis, you would divide $3,650 by 12 to get an allowance of $304.17 per month.

5.

Reduce the employee's pay period taxable compensation by the pay period value of the personal allowances. In this example, you would subtract $304.17 from $2,900 to find the employee has $2,595.83 in income subject to tax withholding per pay period.

6.

Use the IRS tax withholding tables to determine how much money should be withheld from the paycheck for federal income taxes. The tax withholding tables are found in the annual IRS Publication 15. In this example, if the employee was single, for 2010 you would withhold $295.53 for federal income taxes.

7.

Repeat Step 6 with state and local income tax withholding tables, if applicable, to determine how much money should be withheld from your employee's paycheck for state and local income taxes.