The ins and outs of small business payroll taxes

What are payroll taxes?

Payroll taxes refer to the taxes both employers and employees deduct from their salaries, wages, and tips. Payroll taxes consist of local income, state, and federal taxes. Here are some types of payroll taxes that you should know about:

• Federal payroll tax: Under the Federal Insurance Contributions Act (FICA), federal payroll taxes encompass payroll taxes delineated for Social Security and Medicare program funding. FICA taxes are 15.3% for every employee. Tax payments are split evenly by the employer and employee.
• Social Security payroll tax: Social Security payroll tax is a federal payroll tax, designated to pay retired workers over 65 an income after retirement. Employees and employers both pay the Social Security tax. The total liability is equally divided until the employee reaches the wage base limit of $160,200.
• Unemployment tax: Federal Unemployment Tax (FUTA) is handled by employers. It’s paid on the first $7,000 an employee earns. Unemployment taxes also occur at a state level, although the payment onus differs by state. In some states, the employer is solely responsible. In other states, employees may be fully or partially responsible for state unemployment taxes.
• Medicare payroll tax: Medicare payroll deductions go toward the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund. Both funds go toward health insurance and payments for hospital care and medical program administration costs.
• State and local payroll tax: State taxes vary based on local governments, but may include taxes for short-term disability, paid family medical leave, and other programs.

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How small businesses can calculate payroll taxes

Calculating payroll taxes requires careful incorporation of various taxes as well as payroll deductions and reimbursements. The process is as follows:

• Calculate employee gross pay: The first step before calculating taxes is calculating your employees’ payroll. If your employees are salaried, divide their annual income by the number of pay periods in a year. Let’s say your employee Cherie makes $72,000 a year. She’s paid semimonthly, which is 24 times a year. You divide $72,000 by 24 to calculate her gross pay per for each period. Her gross pay per period is $3,000.
• Calculate federal withholding: After you’ve calculated gross pay, refer to each of your employees’ IRS Form W-4 to determine how much income tax to withhold on each pay period. Marital status and allowances are included on this form. Next, refer to the IRS tax tables. Match each employee’s marital status, wages, and allowances on the form to the tentative withholding amount listed on the table.
• Calculate FICA: FICA taxes are 15.3% of an employee’s gross pay; 12.4% is for Social Security and 2.9% is for Medicare. For Cherie’s portion of FICA, the calculations would be the following:
  $3,000 x 12.4% = $372 for Social Security
  $3,000 x 2.9% = $87 for Medicare
  So, Cherie’s total FICA withholding is $372 + $87 = $459.
• Calculate state and local tax: If your employees live in the state of your local business, refer to your state’s withholding table to calculate state tax deductions.
• Subtract any payroll deductions: If your employees have any additional deductions, deduct them from their paychecks. Tax deductions are important for employees, and employers, to include. They can help maximize your tax return.
• Add any reimbursements: If your employees need to be reimbursed for any expenses, add them back to their gross pay.
• Calculate federal and state unemployment tax: The FUTA tax is calculated on the first $7,000 of wages paid to each employee. The FUTA tax rate is 6%. As an employer, you would owe $180 for Cherie’s FUTA payment. For state unemployment taxes, refer to your respective state unemployment tax.

Once you have calculated all deductions, taxes, and reimbursements, you can calculate your total tax liability. Payroll tax calculation is a meticulous process. If there are compliance errors, you can face penalties. Penalties include fines, back taxes, civil and criminal sanctions, and potential jail sentences. As a small business owner, it’s important to be aware you are self-employed. Individuals who are self-employed must also estimate quarterly taxes. You don’t want to incur any penalties from the IRS!

Manage your small business effectively by staying informed of your tax obligations and learning more budgeting tips.