Running a business in the US comes with effectively managing payroll taxes. Payroll tax contributions finance programs like Social Security and Medicare and unemployment insurance. As a business owner, you must learn how to compute and file payroll taxes correctly to stay away from compliance issues and penalties.
Let us clearly understand what payroll tax is, how it's calculated, and also the way you can handle it for your business. If you are a newcomer to payroll or simply want to simplify your process, this article is perfect for you.
What Is Payroll Tax?
Payroll tax represents several taxes which you as a company proprietor have to pay or withhold on behalf of your workers. These taxes have two primary categories:
- You Pay the Taxes as an Employer: They contain contributions to Social Security, Medicare (FICA taxes) along with federal unemployment insurance (FUTA).
- Withhold Taxes from Employee Wages: These include the federal income tax along with appropriate state in addition to local taxes. You are the one gathering that money out of your employees and mailing them to the government.
Employer-Paid Payroll Taxes
Firstly the taxes you pay as a business proprietor. They include FUTA and FICA taxes.
FICA Taxes
FICA stands for Federal Insurance Contributions Act and funds Social Security and Medicare. Both you and your employees pay into these programs. You as the employer match what your workers pay. It really works this way:
- Social Security Taxes: You pay out 6.2% of every worker's earnings to Social Security and you deduct 6.2% of their paycheck for this employee. It taxes earnings up to a wage base limit of USD 147,700 in 2023. Therefore, for a year, Social Security tax on a worker is 6.2% of USD 147,700, or USD 9,114.40.
- Medicare Taxes: Additionally you pay 1.45% of every employee's earnings to Medicare and keep exactly the same portion withheld from their paycheck. This rate applies to all earnings because there's no wage limit for Medicare tax. A worker that makes over USD 200,000 in a year might also owe an extra Medicare tax of 0.9%, and that is paid out by the worker alone.
Collectively, the FICA tax rate is 15.3% (12.4% Social Security & 2.9% Medicare) - divided between you and your workers.
FUTA Tax
FUTA finances unemployment benefits for workers who lose jobs. This particular tax is collected by employers and not by employees. The standard FUTA tax rate is 6% on the very first USD 7,000 of each employee's annual wage. However the majority of employers have a tax credit of 5.4% - you pay just 0.6% in case you stick to state unemployment laws.
For example, in case an employee makes USD 5,000 annually, you pay USD 30 in FUTA tax (USD 5,000 x 0.006).
Employee-Paid Payroll Taxes (Withheld by Employer)
Let us now look at the taxes you collect on your employees and send to the government:
Federal Income Taxes
Federal income tax withholding is based on your worker's income and the information on your employee's Form W 4, such as any allowances and filing status. You will make use of either the Wage Bracket Method or the Percentage Method to figure out just how much to hold from every paycheck.
- The Wage Bracket Technique is easier for most small businesses: match the worker's wages and filing status (e.g., married or single) to IRS-provided tables to determine the withholding amount.
- The Percentage Method is more complicated but gives you more accuracy particularly for higher earners or irregular pay periods.
The withheld federal income tax goes to the IRS each quarter. Send these payments at on time to avoid penalties.
State & Local Taxes
Additionally you must withhold state and, in some instances, local taxes out of your employees' wages along with federal income tax. The rules and amount are dependent on your state & local jurisdiction. As an example, several states have zero state income tax (Texas and Florida have it), and some have higher rates (California along with New York).
You also will pay State Unemployment Tax (SUTA) on their behalf. SUTA rates differ by state and employer and, like FUTA, it funds unemployment benefits.
How to Calculate Payroll Taxes
It might be overwhelming to compute payroll taxes annually, but breaking it down step by step makes it simpler. This is a simple method:
- Determine Employee Gross Pay: Begin with your employee's total income - salary, earnings, tips and bonuses.
- FICA Contributions Calculator: Multiply the gross salary by Social Security & Medicare rates:
- Social Security: 6.2% of wages (USD 147,700).
- Medicare: No limit: 1.45% of wage (no limit).
- Federal Income Tax Calculate: Decide the proper withholding Method (Wage Bracket or Percentage method) and the federal income tax withholding using the employee's Form W-4.
- FUTA Tax Calculator: Multiply that very first USD 7,000 of your employee by 0.6% (assuming you qualify for the 5.4% credit).
- State & Local Taxes: Find out rates and the way to withhold and remit these taxes from your state's tax authority.
Self-Employment Payroll Taxes
In case you're self employed, payroll taxes apply but in another way. You pay both employer and employee parts of FICA taxes (self employed tax) as a self employed person. It is the exact same rate, 15.3% of your net earnings, plus Social Security and Medicare.
In case your net business revenue is USD 50,000, your self-employment tax is USD 7,650 (USD 50,000 x 0.153).
Final Thoughts
Payroll tax may be complex, however with the proper tools and knowledge it can be easy to deal with. Understanding payroll taxes, i.e., the way they're computed & when payments are due can help you remain compliant and your business operating smoothly. In case filing payroll taxes seems overwhelming, outsourcing can save you time and reduce risk of errors.
For expert assistance and effective management of all your payroll requirements, contact The Fino Partners for all your accounting and bookkeeping needs today.
Read Also 5 Essential Steps for Small Businesses to Set Up Payroll Outsourcing
