2How does the payroll process calculate cumulative taxes?

Sometimes an employee has earnings that are accrued unevenly across the year, such as commissions. In these cases, you can use the cumulative tax withholding method during payroll processing.

This method makes sure the payroll process properly calculates their taxes.

Here's the steps the payroll process follows.

1. Calculates the employee's cumulative wages for the calendar year.

   1. Adds the current run wages to the year-to-date wages.

   2. Divides the cumulative wages by the current pay period number.

   3. Multiplies this result by the annual number of pay periods based on the payroll frequency.

2. Calculates the withholding amount based on the cumulative wages.

   1. Calculates the total tax due as determined by the annualized withholding method.

      The tax is based on the cumulative wages determined in the previous step.

   2. Divides the total calculated taxes by the number of annual pay periods.

3. Calculates the actual taxes owed.

   1. Multiplies the withholding amount from the previous step by the current pay period number.

   2. Subtracts this amount from the year-to-date taxes already withheld.

   The remainder amount is the tax to be withheld from wages paid to the employee for the payroll run.