Editor’s note: on August 8, President Trump released an executive order that will allow a deferral of payroll taxes. You can read our summary on this and his other memorandums in less than 2 minutes.
The day you hire your first employee, you become responsible for payroll tax. Despite the name, payroll tax is not a single tax, but a blanket term used to refer to all taxes paid on the wages of employees.
If you have employees, you are going to be responsible for both:
Deducting a portion of employee wages to pay certain taxes on their behalf
Paying payroll taxes on each of your employees out of your own revenue
In this guide, we’ll show you how to calculate employer payroll taxes (the taxes you as the employer will pay) as well as how much employee tax to remit to the government. For a guide on how to do payroll, we’ve got you covered.
When you run payroll, you need to record it on your books. Learn more about how Bench can take care of that for you.
If you don’t have employees
If you run a small business but you don’t have employees, you’ll still have to remit payroll taxes—for yourself. This is called self-employment tax, and is effectively Medicare plus Social Security for yourself (which amounts to 15.3% of your net business income). Learn more in our simple guide on self-employment taxes.
Summary of payroll taxes
There are two types of payroll taxes: ones that come out of your own pocket, and ones that you just collect from employee paychecks and remit to the government.
Payroll taxes that come out of your pocket:
FICA tax: covers social security and Medicare. This cost is shared by employer and employee. The employer portion is 6.2% for social security and 1.45% for Medicare, and you’ll collect and remit the same amount from your employees. Review a CPA’s summary in just a 4 minute read.
FUTA tax: covers unemployment insurance. The total amount is 6.0%. However, most states have a 5.4% credit, meaning most employers only pay 0.6%. Get everything you need to know in a 9 minute read.
Payroll taxes that you just collect and remit:
Federal income taxes
State and local taxes
We’ll cover each of these in detail, beginning with federal income tax withholding, since it’s the most commonly asked about.
What is the percentage of federal income tax withheld?
As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities.
To calculate how much of your employee’s federal income tax to withhold, you’ll need a copy of their Form W-4, as well as your employee’s gross pay.
Your next step is to determine the method you want to use to calculate withholding. Most employers have two options, the wage bracket method and the percentage method. While not exactly simple, the wage bracket method is the more straightforward way to calculate payroll tax.
How to calculate federal income tax withholding using the Wage Bracket Method
In IRS Publication 15-A, find the tables marked “Wage Bracket Percentage Method Tables.” Use the table corresponding to your employee’s pay period.
Check form W-4 to determine whether the employee files income tax as married or single and the number of allowances they claim.
Find the employee’s gross wage for the pay period in columns A and B. The wage should be over the amount found in column A but under the amount found in column B.
Subtract the amount found in Column C.
Multiply the result by the percentage found in Column D.
Check form W-4 to determine if the employee requests additional tax withheld from each paycheck. If they do, add that amount to the final number.
The end result is the amount you should withhold from the employee’s paycheck for that pay period.
Source: IRS Publication 15-A
The Percentage Method is much more complicated—not recommended if you’re doing this alone. If you want to learn more about the Percentage Method, you can read all about both methods in IRS Publication 15-A.
Once you’ve figured out how much income tax to withhold from your employees’ paychecks, your next step is to figure out how much FICA to withhold (more on that below), and how much you’ll be required to pay on their behalf.
FICA stands for “Federal Insurance Contributions Act.” It’s a mandatory payroll tax deduction used to pay for programs like Social Security (disability insurance, old age, survivors) and Medicare (covering health insurance for folks over 65).
When it comes to funding FICA, your employee pays 50% from their paycheck while you, the employer, pay 50% out of your own revenue. As the employer, you are required to withhold and pay the amount your employee is responsible for from her paycheck, and remit those funds on their behalf.
Current FICA tax rates
The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.
Combined, the FICA tax rate is 15.3% of the employees wages.
How to calculate FICA payroll tax
Social Security withholding
To calculate Social Security withholding, multiply your employee’s gross pay for the current pay period by the current Social Security tax rate (6.2%).
This is the amount you will deduct from your employee’s paycheck and remit along with your payroll taxes. (You can learn all you need to know about social security in our CPA reviewed blog post)
Example Social Security withholding calculation:
$5,000 (employee’s gross pay for the current pay period) x .062 (current Social Security tax rate) = $310 (Social Security tax to be deducted from employee’s paycheck)
To calculate Medicare withholding, multiply your employee’s gross pay by the current Medicare tax rate (1.45%).
Example Medicare withholding calculation:
$5,000 (employee’s gross pay for the current pay period) x .0145 (current Medicare tax rate) = $72.50 (Medicare tax to be deducted from employee’s paycheck
As an employer, you are responsible for matching what your employees pay in FICA taxes. So in this case, you would also remit $310 for Social Security tax and $72.50 for Medicare tax.
FUTA stands for Federal Unemployment Tax Act. It’s an employer-paid payroll tax that pays for state unemployment agencies.
The FUTA tax rate is 6% on the first $7,000 of wages paid to employees in a calendar year. However, the actual rate that employers pay is actually 0.6%, since each state receives a credit to cover the remaining 5.4% of FUTA payments.
Unfortunately, some states are currently ineligible for the full credit. You can learn more in our guide to FUTA.
FICA vs FUTA
While FICA is a payroll tax that contributes toward Social Security and Medicare, FUTA (Federal Unemployment Tax Act) is an employer-paid payroll tax that funds state workforce agencies and unemployment insurance. Check out our full guide to FUTA for more info.
They also require different tax forms.
You’ll report FUTA on Form 940 - Employer’s Annual Federal Unemployment Tax Return at the end of the financial year.
How to make payroll tax payments
Calculating your payroll taxes is the hard part. Actually making the payments is easy.
You just enroll in the Electronic Federal Tax Payment System (EFTPS), then make your payment online. It’s the only way to make a payroll tax payment (mailing checks isn’t allowed).
You can access EFTPS here.
State and local payroll tax
Employers are also responsible for paying state and local (city, county, etc.) payroll tax on behalf of employees. As with federal payroll tax, part of this tax is employer paid and part is employee paid. Keep in mind that “employee paid” just means that you, the employer, withhold a certain amount from your employee’s paycheck and then remit it as part of your payroll taxes.
In addition to state payroll tax (State Unemployment Tax, or SUTA), employers are also responsible for remitting state income tax on behalf of their employees. Have all your SUTA questions answered in just a 3 minute read.
State and local payroll taxes are governed at the state and local level, and every state’s payroll tax rules are different. The Federation of Tax Administrators published a list of each state’s taxing authority. You can find out more about payroll tax in your state and local area there.
You can outsource payroll tax
Payroll tax is complex. The calculations are nitpicky and penalties are steep. Even paying payroll taxes just a day late comes with a 2% penalty on the amount due, with that penalty rising as high as 15% for past due payroll taxes.
We highly recommend outsourcing your payroll to a company like Gusto. They’ll take the headache out of everything from paying your employees the right amount at the right time, to handling pesky withholding calculations and payroll taxes.
When it comes time to record payroll costs on your books, Bench can take care of that for you. Learn more about how we are saving small business owners hours of admin every month.
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- 2020 U.S. Small Business Tax Checklist
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