Gross Income

• 1). Multiply the number of hours by the hourly rate of pay. In some cases, an individual might be paid by a daily or weekly rate. This is not necessary for most employees on salary.
  
  
• 2). Add in any additional gross income. According to the U.S. Internal Revenue Service, most employee compensation, such as wages, salaries, fees, commissions, tips, stock options and fringe benefits are taxable. Expenses incurred by an individual that are reimbursed by the employer are not taxable. Cost of Living Allowances (COLA) are also non-taxable.
  
  
• 3). Find the number of allowances listed on the W-4 form of the individual that is filed with the employer upon hiring. Allowances, or exemptions, are a deduction of $3,650 in taxable income for each individual claimed. That could include the individual, a spouse and any qualifying dependents. Multiply the total number of allowances by $3,650, then divide by the number of pay periods in a year to find the total exemption amount per period. For two allowances on a semi-monthly frequency, the amount would be $304.17 or $304 ($7,300 / 24).
  
  

Federal, FICA & Medicare

• 1). Look up the payroll tables in IRS publication 15 (Circular E). Based on the pay frequency (i.e,. weekly, biweekly, semi-monthly, monthly, etc.), gross income for the pay period and number of allowances, the chart will show the amount of Federal withholding, rounded up to the nearest dollar. The amounts in the table are prorated based on the marginal tax rates from federal income brackets, divided by the number of pay periods in a year for the selected frequency. For example, if, in a semi-monthly pay period, a person earned $500 after the prorated exemption, he would be expected to earn $12,000 in a year, which as of 2010 is in the 15 percent tax bracket.
  
  
• 2). Multiply gross income by 6.2 percent or .062. This is your FICA or Social Security withholding. It's important to note that this is of gross income and not taxable income. Also, FICA is capped at $106,800. Once an individual reaches that income level, they are no longer taxed FICA for the rest of the year.
  
  
• 3). Multiply gross income by 1.45 percent of .0145. This is your Medicare withholding.