Managing the Payroll – All about Payroll Taxes
As an employer, you are responsible for sending in two kinds of payroll taxes: the kind you deduct from paychecks, and the kind that you pay in addition to the payroll. There are three basic withholding taxes, two standard employer-side taxes, and unemployment insurance (also an employer- only tax).
The withholding taxes, which are deducted from your employees’ gross paychecks, include income tax (always federal, usually state, and sometimes also local), Social Security, and Medicare. The two employer-side taxes are the “matching” contributions to Social Security and Medicare. Then, ﬁnally, come federal and state unemployment insurance obligations.
Yes, it’s a lot of taxes, a lot of calculations, and a lot of paperwork. On the plus side, the grand total is deductible from your company’s income, lowering the company’s income tax burden.
Any tax you deduct from an employee’s paycheck is a withholding tax. The four most common withholding taxes are federal income tax, state income tax, Social Security, and Medicare. In some states, you may also have to withhold for unemployment or disability insurance.
In order to ﬁgure out how much to deduct for income taxes, you need to know some basic information about each employee. That includes his marital status and the number of allowances he’s claiming, both of which you can get from the W-4. You also need his gross salary for the period and the amount of any pretax deductions.
Pretax deductions are subtracted from your employees’ gross pay before you figure out how much income tax to withhold. Common examples include retirement plan contributions and health insurance premiums. For example, suppose Mary earns $250 per week. If she pays in $10 to her 401(k) and $20 toward health insurance, you would calculate her income tax withholding on $220 instead of $250.
If you’ve got payroll, chances are that you are required to deal with federal unemployment taxes (FUT), and the state version as well. At the federal level, these taxes are paid only by employers (no withholding here), and they’re based directly on the total wages paid to employees. When it comes to state rules, though, there’s a lot of variation.
Here are the general rules of state unemployment taxes:
- They are paid by employers only.
- They reduce your FUT burden.
- The tax rate is based on how many of your employees have ﬁled unemployment claims.
- There’s a cap on the maximum tax you’ll owe for each employee.
As you’d expect, the speciﬁcs vary pretty widely, especially when it comes to crunching the numbers. Plus, in a couple of states, employees as well as employers do have to pay in to the system, and that means extra withholding responsibilities for employers. In regard to the FUT impact, if you pay any amount of state unemployment tax, you get a break on the federal; also, some states levy this tax even when your company is exempt at the federal level.