How to Calculate 2018 Payroll Taxes

Calculating payroll taxes for a past year like 2018 often comes up during audits, when amending prior returns, or for historical business analysis. It requires using the specific tax rates, wage limits, and income tax withholding tables that were in effect for that year. This guide walks you through every step of calculating federal payroll taxes for 2018, ensuring your records are accurate and defensible.

Key Payroll Tax Components for 2018

For any given employee's paycheck in 2018, you were responsible for calculating, withholding, and remitting several types of federal taxes. These obligations were split between the employee and the employer.

Taxes withheld from an employee's wages:

• Federal Income Tax (FIT)
• Social Security tax (part of FICA)
• Medicare tax (part of FICA)

Taxes paid directly by the employer:

• Social Security tax (employer's matching portion)
• Medicare tax (employer's matching portion)
• Federal Unemployment Tax (FUTA)

To perform the calculations correctly, you first need to gather the correct form for each employee. For 2018, this was the Form W-4, Employee’s Withholding Allowance Certificate. This form is substantially different from the one used today, as it relied on personal allowances to determine tax withholding. You'll need the employee's marital status and the number of allowances they claimed.

Step 1: Calculate Federal Income Tax Withholding (FITW)

Federal income tax is a pay-as-you-go tax. In 2018, the amount withheld depended on an employee's gross pay, pay period frequency, marital status, and the number of withholding allowances they claimed on their W-4. The Tax Cuts and Jobs Act of 2017 made significant changes to tax brackets, which were reflected in the 2018 withholding tables.

The IRS provides two primary methods for this calculation: the Wage Bracket Method and the Percentage Method. The Percentage Method is more scalable, so we will use it for our example. You’ll need the official 2018 tax tables found in the IRS Publication 15 (Circular E).

First, you must determine the value of one withholding allowance for the specific pay period. For 2018, one annual allowance was worth $4,150. To find the value for your pay period, divide this by the number of pay periods in the year:

• Weekly: $4,150 / 52 = $79.80
• Bi-weekly: $4,150 / 26 = $159.60
• Semi-monthly: $4,150 / 24 = $172.90
• Monthly: $4,150 / 12 = $345.80

Example FITW Calculation (Percentage Method)

Let's calculate the FITW for a fictional employee, Sarah. She works for you in 2018 and has the following details:

• Gross Pay: $2,000
• Pay Frequency: Bi-weekly
• Marital Status (from W-4): Single
• Withholding Allowances (from W-4): 2

Here’s the process:

1. Determine the total allowance amount: First, find the value of one bi-weekly allowance ($159.60). Then, multiply it by the number of allowances Sarah claimed (2).

$159.60 (one allowance) x 2 (allowances claimed) = $319.20

2. Calculate the employee's adjusted wage: Subtract the total allowance amount from the employee's gross pay.

$2,000 (gross pay) - $319.20 = $1,680.80

3. Use the 2018 Percentage Method Table: Now, find the "Tables for Percentage Method of Withholding" in the 2018 Publication 15. We'll use the table for a Single Person on a Bi-weekly pay schedule.

Looking at that table, an adjusted wage of $1,680.80 falls into the bracket "Over $1,475 but not over $3,165."

The tax calculation for this bracket is: $170.60 plus 22% of the excess over $1,475.

4. Calculate the final withholding amount:

First, find the "excess" amount: $1,680.80 - $1,475 = $205.80

Next, calculate 22% of that amount: $205.80 x 0.22 = $45.28

Finally, add this to the base amount for the bracket: $170.60 + $45.28 = $215.88

So, the correct federal income tax withholding for Sarah's paycheck is $215.88.

Step 2: Calculate FICA Taxes (Social Security & Medicare)

FICA taxes are a mandatory contribution to fund Social Security and Medicare. This tax is split evenly between the employee and the employer.

Social Security Tax in 2018

For 2018, the Social Security tax rate was 6.2% for the employee and 6.2% for the employer (12.4% total) on wages up to a certain limit.

• Employee Rate: 6.2%
• Employer Rate: 6.2%
• 2018 Annual Wage Base Limit: $128,400

Once an employee's year-to-date earnings exceeded $128,400, Social Security tax was no longer withheld for the remainder of the year. For our example, let's assume Sarah is well below this limit.

Calculation for Sarah's paycheck:

$2,000 (gross pay) x 6.2% = $124.00

You would withhold $124.00 from Sarah’s check and contribute an additional $124.00 as the employer.

Medicare Tax in 2018

The Medicare tax funded hospital insurance. Unlike Social Security, it does not have an annual wage limit.

• Employee Rate: 1.45%
• Employer Rate: 1.45%

Calculation for Sarah's paycheck:

$2,000 (gross pay) x 1.45% = $29.00

You would withhold $29.00 from her check and contribute a matching additional $29.00.

Additional Medicare Tax for High Earners

A 0.9% Additional Medicare Tax was also in effect in 2018. This was an employee-only tax applied to wages once earnings exceeded certain thresholds. It was your responsibility as the employer to begin withholding this tax in the pay period the employee's wages crossed the line.

The 2018 thresholds were:

• Single Filers: $200,000
• Married Filing Jointly: $250,000
• Married Filing Separately: $125,000

Step 3: Calculate Federal Unemployment Tax (FUTA)

FUTA tax is an employer-only tax that funds the federal government's share of unemployment insurance programs.

• 2018 FUTA Rate: 6.0%
• 2018 Wage Base Limit: $7,000 per employee per year

The tax is calculated on the first $7,000 an employee earns. Most businesses, however, are eligible for a credit that dramatically reduces this rate. If you paid your state unemployment taxes on time, you were eligible for a credit of up to 5.4%. This reduced the effective FUTA tax rate to 0.6%.

Let's assume this is one of Sarah's first paychecks of 2018, and you are eligible for the full credit.

FUTA Calculation for Sarah's paycheck:

$2,000 (wages) x 0.6% = $12.00

This $12.00 is an expense for the business and is not withheld from the employee’s pay.

Putting It All Together: Final 2018 Payroll Summary

Let's consolidate the full payroll calculation for Sarah's $2,000 bi-weekly paycheck.

Employee Withholdings:

• Gross Pay: $2,000.00
• Federal Income Tax: -$215.88
• Social Security Tax: -$124.00
• Medicare Tax: -$29.00
• Total Withholding: $368.88
• Net Pay: $1,631.12

Employer Tax Expenses:

• Social Security Match: $124.00
• Medicare Match: $29.00
• FUTA Tax: $12.00
• Total Employer Payroll Tax: $165.00

Your total tax deposit responsibility to the federal government for this single paycheck would be the employee withholding ($368.88) plus the employer taxes ($165.00), for a total of $533.88.

Don't Forget State and Local Taxes

This guide focuses exclusively on federal payroll taxes for 2018. Remember that you also had obligations for state and (where applicable) local taxes. This includes state income tax withholding, state unemployment insurance (SUI), and sometimes local wage or disability taxes. Each state has its own forms, rates, and rules, so always consult the relevant state agencies for accurate historical information.

Final Thoughts

Accurately running historical payroll calculations requires a close eye on the regulations of the past, using the specific rates, thresholds, and forms for that period like 2018. Following this guide ensures you are using the precise values for federal taxes, giving you reliable figures for any audits, amendments, or financial review.

While looking up old tables for past tax filings is a necessary occasional task, today’s accounting professionals face a constant stream of new, complex questions that demand fast research. This is why we built Feather AI to help. It provides instant, citation-backed answers to your tax questions sourced directly from the IRC, IRS guidance, and state tax codes, letting you move from question to defensible answer in seconds so you can focus on advisory, not archaeology.