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 employee's wages.
If you have employees, you are going to be responsible for both:
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.
If you run a small business without any 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 guide to self-employment taxes.
Payroll taxes when you do have employees gets a little trickier.
Since your business and your employee are both taxpayers, there are two types of payroll taxes: ones that come out of your own pocket and ones that you collect from employee paychecks and remit to the federal government.
We'll cover both of these in more detail later on.
We'll cover each of these in detail, beginning with federal income tax withholding.
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 or the Percentage Method. While not exactly simple, the wage bracket method is the more straightforward approach to calculating payroll tax.
When using the Wage Bracket Method, there are two possible calculations: one for employees with a Form W-4 from 2019 or earlier, the other for employees with a Form W-4 from 2020 or later.
Employees with a Form W-4 from 2019 or earlier:
Employees with a Form W-4 from 2020 or later:
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 it and the wage bracket methods in IRS Publication 15-T.
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 their paycheck, and remit those funds on their behalf.
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 employee's wages.
Do any of your employees make over $147,700? If so, the rules are a little different, and they may owe additional Medicare tax. Read more at the IRS.gov website.
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.
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)
Further reading: Social Security Tax: What Employers Need to Know
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. 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, employers actually pay 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.
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.
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. The due date is January 31.
You'll report FICA quarterly using Form 941 - Employer's Quarterly Federal Tax Return. The due date is the last day of the month following the quarter. For example, if your quarter ends on March 31, the form is due on April 30.
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.
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.
State and local payroll taxes are governed at the state and local levels, and payroll tax rates and rules vary by jurisdiction. To find out more about payroll tax in your state and local area, check out the Federation of Tax Administrators' list of each state's taxing authority.
Payroll tax is complex. The calculations are nitpicky, and the 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.
If you'd rather not deal with the stress, 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. Whenever you need to check your records, you'll have automatically generated pay stubs to review with all the essential information.
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