You hired a payroll vendor to take care of your payroll and taxes. But what about your responsibility to pay taxes as an employer? Which payroll taxes are the employee's responsibility? How do you calculate payroll taxes?
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Taxes differ in responsibility for both employers and employees. We’ll break down the basics for you here.
1. What is payroll tax?
If your business has employees, you’re required to withhold payroll taxes from employees’ paychecks and pay any applicable federal, state and local taxes.
Federal taxes include the following:
- Federal Insurance Contributions Act (FICA) - Half is paid by the employer, half is paid by the employee.
- Federal Unemployment Tax Act (FUTA) - Paid for completely by the employer.
- Federal income tax - Paid for by the employee.
On the state level, State Unemployment taxes are mostly the responsibility of the employer. For some states though, such as Pennsylvania and Ohio, State Unemployment Insurance (SUI) taxes are the responsibility of both the employer and employee.
Always check your local regulations as there are certain payroll taxes that are as specific as which municipality or township you operate within.
2. Which workers are taxable?
Before you even get to all these calculations, you must determine the number of taxable workers you employ. That might seem like an obvious step, but it could be easy to overlook the tax responsibilities of an employee versus an independent contractor. Employees are subject to payroll taxes while independent contractors are responsible for paying their own taxes.
The IRS has a comprehensive guide for determining the difference, but here’s a quick set of questions to ask that can help.
- Does the company control or have the right to control what the worker does and how he or she does the job?
- Are the business aspects of the job controlled by the payer? (Ex. Are expenses reimbursed?)
- Are there written contracts or employee type benefits? (Ex. Vacation pay or insurance). Will the relationship continue and is the work a key aspect of the business?
For more information on classifying your employees, read here.
In order to calculate your payroll tax, you must know the current rates. Keep in mind that the information the employee puts on their Form W-4 would impact how much or how little they would be taxed.
Here are some federal numbers:
The Social Security tax rate for employees is 6.2 percent of the employee’s gross pay. (As the employer, you match what the employee pays, meaning your rate would be 12.4 percent).
For state unemployment, it varies widely based on factors of what type of business you are and which state you are in.
The Social Security taxable wage base is $137,200.
The Medicare tax rate is 1.45 percent of the employee’s gross pay.
The FUTA tax rate is 6.0 percent of the first $7,000 you pay in wages to an employee.
The Self-Employment Contributions Act (SECA) tax rate is 15.3 percent. This means if you’re self-employed, you pay both the rates for yourself as the employer and yourself as the employee.
For state-specific numbers, check our Quick Wage & Tax Guide. We update this resource every year.
4. What are taxable wages?
At its most basic level, taxable wages are compensation for services performed. This would include salary, bonuses or gifts. Other forms of compensation that you might provide such as business expense reimbursement do not qualify as taxable wages. For the expenses to be nontaxable, they must be necessary, reasonable and business-related, and employees have to verify them through receipts or expense reports.
5. Withholding – What are the responsibilities for both the employee & employer?
Upon hiring, each employee is required to fill out a Form W-4. Federal, state and local taxes (when applicable) are calculated based on that form. Your employee will provide their filing status and the number of allowances they are qualified to take and that is used to calculate the amount held from gross pay.
Federal withholding on payroll taxes are paid using Forms 940 and 941.
Both - FICA
FICA is the federal law that requires employers to withhold Social Security and Medicare taxes from employees’ wages. It requires the employer and employee to each pay half of the FICA tax.
FICA taxes are unaffected by the number of withholding exemptions claimed by the employee. To calculate, you multiply an employee’s gross wage payment by the applicable tax rate to determine how much to withhold and how much you must pay as an employer.
Do you offer benefits that are funded through payroll deductions? Some are made on a pre-tax basis, thus reducing the amount of pay that is subject to tax.
Examples of these types of deductions that need to be factored in are:
- Contributions to certain types of retirement plans.
- If you are a nonprofit, your employees may participate in a 403(b) plan.
- A health flexible spending account (FSA) or a health savings account (HSA).
Employer - FUTA
This tax is paid by the employer. You are required to pay this tax if either of the following applies:
- You pay wages totaling in at least $1,500 per quarter.
- You have at least one employee on any day for 20 weeks in a calendar year (regardless of if these weeks are consecutive).
6. Where can I go for resources?
This breakdown only scratches the surface of how to calculate payroll taxes. As you can tell, it can be very complicated. If you would like to do some of your own calculations, visit our resources tab on PrimePay.com and choose calculators. Here you’ll find options such as salary paycheck, FICA tip credit, and gross-up calculators, and much more. These calculators are beneficial for both you and your employees.
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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.
Editor's Note: This post was originally published on Sept. 29, 2017, and October 24, 2018, and has been updated for freshness, accuracy, and comprehensiveness.