Today, we’re going to be deep-diving into US payroll taxes.
And after helping hundreds of businesses with their accounting and taxes, we know a thing or two about it.
It doesn’t matter if you have one employee, 10 employees, 50 employees or haven’t even started your business yet, you are going to want to read this post in its entirety. My promise to you is that any question you have about payroll taxes will be answered and the high-level details you need to know about payroll taxes will be shared.
Note that for guidance or advice specific to your business, you should consult with a tax or legal professional.
So let’s get started!
Categories of US Payroll Taxes
First, at a high-level, you need to know that there are three categories of payroll taxes:
- taxes that the employees pay,
- taxes that the employer pays, and
- taxes that both employee and employer pay
Payroll taxes that only employees pay typically consist of:
– Federal Income Tax
– State Income Tax
Payroll taxes that only employers pay typically consist of:
– Federal Unemployment Tax
– State Unemployment Tax
Both employer and employee pay taxes toward:
– Social Security
The difference is that employees pay INCOME tax at the state and federal level, while employers pay UNEMPLOYMENT tax at the state and federal level.
Here’s a quick breakdown of who pays what and how much:
|EMPLOYER PAYS||EMPLOYEE PAYS||TOTAL||WAGE CAP|
Types of US Payroll Taxes
Let’s discuss each type of tax starting with:
1. Social Security and Medicare
Based on the Federal Insurance Contributions Act, you and your employee have to pay a 7.65% tax. Also known as FICA, this is a mandatory tax expense for the employee and employer that is used to fund social security and Medicare in the U.S. It is based on the gross wages earned by the employee.
More specifically, 6.2% goes towards social security and 1.45% goes towards Medicare. Combined, 7.65% in FICA taxes.
2. Federal Unemployment Tax Act
Not to be confused with FICA, FUTA taxes are paid only by the employer to help the Federal government assist states with their unemployment program if needed. FUTA is a 6% tax based on the first $7,000 of wages you pay each employee.
3. State Unemployment Tax Act
SUTA taxes represent state unemployment taxes. SUTA is only paid by the employer on behalf of each employee. SUTA is unemployment insurance. The funds collected are used for individuals who are laid off from their jobs.
State withholding taxes (if imposed) are based on W-4 information for the employee but there is also an employer portion too.
Now that we know who pays what, let’s discuss how to pay your payroll taxes.
How to Pay Your Payroll Taxes
Once you have withheld the proper amount of Federal, FICA and Medicare taxes, you will need to calculate your portion in FICA, Medicare and SUTA taxes.
Then, pay these amounts to the appropriate agencies, either monthly or semi-weekly, depending on the size of your company.
For federal taxes, payments must be made electronically through the Electronic Federal Tax Payment System, or EFTPS. This method is free.
For state taxes, the method of paying varies from state to state, so check with your particular state’s preferred method.
You report your payroll taxes on Form 941 quarterly. For FUTA taxes, you report these amounts on Form 940 annually.
What About Independent Contractors or the Self-employed?
Well, independent contractors are not considered employees. Employers do not pay any payroll taxes on independent contractors they hire.
Be sure that the person or people you claim to be an independent contractor are actually classified as an independent contractor. According to the IRS, an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
Independent contractors or those who are self employed, pay self-employment tax on their net earnings from self-employment. That tax is essentially the employee and employer share of FICA.
What About the Payroll Tax Deferral Under the Cares Act?
Well, on August 8, 2020, the President issued an executive order stating that the employee’s portion of Social Security tax could be deferred effective September 1, 2020, through December 31, 2020 for US workers earning less than $4,000 on a pretax biweekly basis, or about $104,000 annually.
This was enacted to help Americans see a near-term bump in their paychecks.
But note that those Social Security taxes will need to be repaid between Jan. 1, 2021, and April 30, 2021, if a permanent cut is granted in the future.
As a bonus let’s talk about compensation.
What is Compensation?
A ton of businesses get caught off-guard when predicting payroll taxes because they forget to include all forms of compensation.
Well, total compensation isn’t just salary.
Employee compensation includes:
- overtime pay
All things considered gross pay and consequently items you have to pay taxes on.
That’s it, a high-level overview of what you need to know about payroll taxes.
As a recap, we learned that employees pay taxes toward Federal Income Tax and State Income Tax. Employers pay taxes toward Federal Unemployment Tax and State Unemployment Tax. And both employer and employee pay taxes toward Social Security and Medicare.
Then we learned that federal taxes payments must be made electronically through the Electronic Federal Tax Payment System, or EFTPS (free to do so). For state taxes, the method of paying varies from state to state, so you will need to check with your particular state’s preferred method.
Next we learned that employers do not have to pay payroll taxes on independent contractors but independent contractors and the self-employed do have to pay self-employment taxes.
Furthermore, we discussed the 2020 Payroll Tax Deferral under the Cares Act for US workers earning less than $4,000 on a pretax biweekly basis, or about $104,000 annually. That will have to be paid back.
And lastly we learned that total compensation that is taxable includes all wages, salaries, commissions, bonuses, and overtime pay.
However, if you need help with your business taxes, LYFE Accounting is just one click away. We provide a number of financial solutions to businesses like yours- from tax preparation, to tax planning, to accounting, to bookkeeping, and to CFO services, we’re here to help! Contact us now at 470-240-1437.