Understanding Employment Taxes for Business Owners
Adding employees increase your business cost, not just the additional salary and benefits but the additional compliance cost at the local, state, and federal level. One of the most important cost to consider is the employment taxes, also known a payroll taxes.
Social Security & Medicare TaxSocial Security and Medicare Insurance tax, also known as "FICA" tax, is used to fund Social Security and Medicare. FICA tax is split up into two portions, the Social Security and Medicare portion. In addition, each portion is again broken up into two parts.
For purposes of Social Security, a total of 12.4% of certain wages of an employee is remitted to the government. The employer (6.2%) and the employee (6.2%) each pay half of the total amount but the employer is responsible for withholding the employee*s portion from their paycheck. The Social Security portion of FICA tax is limited to the first $128,400 (adjusted annually) of wages paid to that employee.
For purposes of Medicare, a total of 2.9% of certain wages paid to an employee is remitted to the government. The employer (1.45%) and the employee (1.45%) each pay half of the total amount but the employer is responsible for withholding the employee*s portion from their paycheck. In addition, once an employee reaches over $200,000 ($250,000 if married) in wages than the employee is required to pay an additional 0.9% of wages, which is called the *additional Medicare tax.* Unlike Social Security, there is no cap on the wages subject to Medicare tax.
In addition to your requirement to withhold, pay, and remit FICA taxes you are also required to report such information to the IRS. The IRS has standardized the process by creating a form that can use for such purposes. IRS Form 941, Employer*s Quarterly Federal Tax Return, is a quarterly return that an employer must submit to the IRS that describes who you are, how many employees you have, how much in wages you*ve paid, and if you are eligible for any credits against your payroll taxes. Once you*ve determined this information, the form helps you calculate how much should have been paid in FICA taxes and if there have been any over or underpayments for that time period.
Federal Unemployment TaxFUTA is the Federal Unemployment Insurance tax. While most individuals are not thinking about unemployment when the economy is humming along, unemployment insurance provides a resource for individuals to get over a short-hump until the next opportunity presents itself. In order to fund the unemployment insurance account, each employer is required to pay unemployment insurance tax for each of its employees. Current guidelines require an employer to pay unemployment insurance tax at a rate of 6% up to the first $7,000 of wages paid to the employee. Even though the tax rate is officially 6%, if an employer meets certain criteria then they can take a credit of up to 5.4% when they file their tax return.
Similar to IRS Form 941, the IRS uses Form 940, Employer*s Annual Federal Unemployment Tax Return to report your unemployment tax payments. Even though the Form is an annual tax return, the deposit schedule is not necessarily annually. In fact, for purposes of FUTA, an employer is required to deposit taxes quarterly if the liability exceeds $500. If the liability is less than $500 for that quarter than that amount is carried forward to the next quarter. Once the tax liability exceeds $500 during the quarter, including carryforward amounts, then the employer is required to make the deposit.
State Unemployment TaxSUTA is the state unemployment insurance program. SUTA can be similar in some ways to FUTA but can be quite different from one state to the next. Each state has created its own guidelines for the administration of its state unemployment insurance program. However, each state sets its applicable determination of the type of wages subject to SUTA, the total wage amount subject to SUTA, and the tax rate charged to the employer. The factors used by each state usually revolve around the total amount in the state*s unemployment trust fund, the amount the employer has paid into the trust account, the amount(s) withdrawn from the employer*s trust account, and the particular industry of the employer. Based on these factors, each employer is assigned a tax rate that they are required to pay unemployment tax on for that particular *year.* For new employers, most states have set a fixed rate that is commonly around 2.7% for up to three years.