The IRS is very strict on payroll tax and the deductions associated with it. Even a small miscalculation can land an organization in serious trouble with this regulatory authority. So, it is important to maintain careful records of payroll accounts in any organization.

The first step to calculating payroll tax is getting each employee to fill out Form W-4 from the Internal Revenue Service. (As well as your state unless your state has no income tax for individuals.) This form aims to calculate the payroll tax depending on the marital status of an employee and the number of dependents.
The employee’s portion of the Social Security tax, which is withheld from employees salary and wages during 2011, will be 4.2% of the first $106,800 of each employee’s taxable earnings. (The employee withholding rate of 4.2% is two percentage points lower than the 2010 rate of 6.2%.) Each employee’s earnings in excess of $106,800 are not subject to the Social Security tax.
The employer’s portion of the Social Security tax in 2011 remains at 6.2% of each employee’s first $106,800 of taxable earnings. There is no employer Social Security tax on any employee’s earnings above $106,800 during 2011.
In addition to the Social Security tax, the employee must have withholdings for the Medicare tax of 1.45% of every dollar of salary or wages. The employer must also pay a Medicare tax of 1.45% on every dollar of every employee’s salary or wages. Hence, the combined Medicare tax for 2011 remains at 2.9% on all employees’ earnings.
The Federal Unemployment Taxes (FUTA) is also calculated at 6.2%, but an employer can take credit up to 5.4%. The FUTA wage base is $7,000 dollars; an employee whose wages exceed this amount in a year, stops paying FUTA taxes that year. The same rules are applicable to State Unemployment Taxes (SUTA) also.
These calculations and deductions have to be done accurately to avoid any confusion. Each company must have a payroll account to that these deductions are transferred to and paid to the state and central governments at the end of the year.

There are many payroll services out there that can automate much of this process and will maintain your records. The system I use is also the system I sell to my clients, all I have to do is go on line enter my employees hours and the online system calculates the withholding for me. Learn more by checking out my site http://lrtaxprep.com/Onlinepayroll.php where you can log on to a sample of what I am talking about.