Payroll taxes can seem like a maze with many twists and turns and you may feel like you are at a dead end. The key to breaking through this initial confusion is to identify two different paths related to payroll taxes.
Employee Taxes – those that are withheld from employees’ wages
Employer Taxes – the portion of the payroll taxes that employer must pay
Both of these taxes can be imposed by federal, state and local governments. Knowing which ones pertain to your business is essential to making it out of the maze and staying in compliance and avoiding penalties.
FICA Taxes: (Federal Insurance Contributions Act) – these taxes are made up of two components and are paid by both the employee and the employer. FICA taxes are administered by the IRS and the Social Security Administration
- Social Security Tax – this tax funds benefits for retirement, dependents of retired workers and the disabled and their dependents. Social security is a flat 12.4% and only applied to the first $132,900 of what an employee earns for 2019. In 2018 this wage base was $128,400. This tax is divided equally between the employer and the employee. 6.2% is withheld from employee’s wages and 6.2% is paid by employer.
- Medicare Tax – this tax funds medical benefits for people once they reach age 65. This tax is 2.9% and also split equally between withholding 1.45% from employee’s wages and the employer contributing 1.45%. There is not a cap on wages subject to Medicare tax. High wage earners may owe an additional Medicare tax of .9% on wages over certain limits based on your filing status. Only the employee pays this additional tax.
Income Taxes: these taxes come out of employees’ wages. Employers do not contribute to these taxes.
- Federal Withholding Taxes –Employers are required to withhold federal income tax from employees’ wages. There is not a standard withholding rate. The amount withheld is based on the IRS tax withholding tables and the Federal Form W-4 which is completed by employees when hired and ideally updated annually. If an employee claims exemption from federal withholding on their W-4, the employer is not required to withhold federal income tax for that employee
- State Income Taxes – state taxes are withheld based on rules of the state revenue agency. Some states do not require income tax withholding, however most do.
- Local Payroll Income Taxes – local governments may require withholding for city, county or other forms of local taxes.
Unemployment Taxes: these taxes are paid by the employer
- Federal Unemployment Taxes – (FUTA) the percent paid is a straight percentage of the first $7,000 and a credit can lower this percentage based on if you paid your state unemployment taxes, as required.
- State Unemployment Taxes – (SUTA) Sometimes called state unemployment insurance. Each state is responsible for determining unemployment rates for new and existing employers. New businesses are given a new employee rate which may increase or decrease over time depending on how many claims have been drawn on the employer’s account. Generally, the state unemployment agency sends employers their unemployment rate and the annual wage base each year.
Each of these taxes must be remitted to the appropriate agency within specified guidelines and with corresponding forms and schedules. These deadlines and filing frequencies are based upon total tax liabilities within specific time periods.