Are you struggling with handling the different types of payroll taxes? Do you want more information so you can breathe easier?
Well, hiring your first employee means you become responsible for many different types of payroll taxes. (Payroll taxes can also be known as employer taxes or employment taxes.) Meeting all of these requirements can be a daunting task, but it’s one of the biggest parts of being an employer.
If you’re new to being an employer, check out our post on Employer Compliance Tips.
Let’s dive in to discussing the different types of payroll taxes.
Payroll Tax Types Overview
There are many payroll tax types that you are responsible for when you have employees. When they earn wages, you become responsible for withholding taxes and remitting them on behalf of your employees. This is one of the most basic requirements of having employees, but it is vital that you understand all that is required of you.
The main payroll taxes are Federal Income Taxes, Social Security and Medicare, and you are required to withhold these from employee paychecks. It is then your responsibility to deposit this tax withholding based on an IRS schedule (monthly or semi-weekly). Being late by even one day can cause you to incur penalties.
Let’s dive into talking about the main three payroll taxes.
Federal Income Tax Withholding
Within the first few days of employment, your employees should fill out a Form W-4. This form allows them to determine their allowances from withholding. It also helps you determine what to withhold from their paychecks for Federal Income Tax.
If you want to take on the challenge of determining the exact amount to withhold, the IRS has information that you can use here. However, I would highly recommend using an outside payroll processor to make your life easier.
Anytime an employee goes through a major life event (new child, marital status change, etc.), they should update their W-4 to adjust their withholding. When that happens, you, as the employer, are required to adjust the amount being withheld from their paychecks.
Social Security Tax Withholding
The next thing you need to think about is Social Security. Social Security is one of the payroll taxes instituted by FICA (Federal Insurance Contribution Act), and it’s paid by both employees and employers.
The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. So, you will withhold 6.2% from each employee’s gross pay, and then you will pay in 6.2% to match the amount they paid. This is a true expense to the business, and it’s just part of having employees.
Thankfully, when an employee’s wages reach $132,900 for 2019, you can stop withholding this tax. This is called the wage base limit.
Medicare Tax Withholding
Medicare tax is the other part of the payroll taxes instituted by FICA that is split between you and your employees.
The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. So, you will withhold 1.45% from each employee’s gross pay, and then you will pay in 1.45% to match the amount they paid. This is also a true expense to the business.
Unfortunately, Medicare is different than Social Security so the wage base limit doesn’t exist. This means that the tax amounts are paid on any wages the employee makes.
In addition to that, once an employee’s pay reaches $200,000 in wages for the year, you have to withhold an additional 0.9% Additional Medicare tax from their paychecks. Thankfully, you don’t have to match this additional amount.
Other Employer Taxes
In addition to Federal Income Taxes and FICA taxes, you may also be responsible for paying several other types of employer taxes.
Federal Unemployment Taxes (FUTA)
Did I mention that you also have to deal with Federal Unemployment Taxes? This tax is only paid by you on behalf of employees.
Currently, the FUTA tax rate is 6% on the first $7,000 an employee earns. Once they surpass $7,000 in wages, you no longer owe anything for FUTA. There are annual returns required for FUTA along with quarterly deposits in most cases.
State Unemployment Taxes (SUTA)
Most states, Texas included, will also require you to pay State Unemployment Taxes. This is based on a wage base and tax rate similar to the Federal Unemployment guidelines. However, the deposits and return filings are completely separate. Consult your state for more details.
Worker’s Compensation
In most states, you are required to have Worker’s Compensation Insurance. Even if your state does not require it (Texas does not), you should do your research. This insurance can greatly decrease your business liability in the event of a work-related, employee injury.
If you are not covered, you may be required to display special posters around your office or place of work for employees to be made aware of your lack of coverage. Consult your state and/or an insurance agent for more details.
State Income Taxes (Texas does not have a state income tax.)
If you’re state has an income tax, then you are responsible for state income tax withholding for each employee. This is similar to federal income tax withholding, but it varies depending on the state. Consult your state for more details.
Wrapping It Up
As you can see, dealing with payroll taxes can be a difficult task. Thankfully, you don’t have to go it alone.
There are many different payroll outsourcing options that will automate these tasks to make your life just a little bit easier. Be sure to talk with a bookkeeper or tax or accounting professional and have them walk you through the ins and outs.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions about what this means for your business before taking any further action. Also note that this list may not be exhaustive depending on your business situation.
