The Payroll Playbook: Which Payroll Taxes are Paid by Employers


“Who’s FICA? And why is he taking all of my cash?” — Rachel Inexperienced and each beginner taking a look at their first paycheck.

Seems FICA isn’t a man; it’s the Federal Insurance coverage Contributions Act. And all people who earns a paycheck, whether or not by means of wages, wage, or suggestions (sure, suggestions rely too) contributes a portion of their pay to FICA to fund federal social applications. Is it a complete bummer to not obtain that pre-tax whole? Certain. However taxes are simply a part of having a job in America, so pay we should.

Maintain on. Aren’t you interested by precisely the place your hard-earned cash goes and who’s answerable for paying for what? We figured as a lot. So we’re going to slice by means of the confusion and make it as straightforward as pie. And talking of pie…

What are payroll taxes?

Consider your paycheck as a large pizza. Payroll taxes are mainly a slice of your paycheck put aside for the federal government. Taken as a proportion of your earnings, this cash goes to fund issues like Social Safety, Medicare, and unemployment advantages—you already know, these security nets all of us hope we by no means want, however positive are glad they’re there after we do.

Now, staff and employers share the burden relating to taxes. Employers are on the hook for some, staff are on the hook for others, and a few taxes require a slice of each pies. Though most of us would like to maintain the pie all to ourselves, sharing is about greater than caring, it’s the legislation—so we’d as effectively discover ways to dish it out appropriately.

What’s the principle distinction between employer and worker payroll taxes?

Employers and staff share the burden of sure taxes and take care of others on their very own. The principle distinction is how they’re collected.  

Worker payroll taxes are primarily slices that employers take out of your paycheck pizza (by means of direct deductions) earlier than it’s delivered to you. This pays for applications like Social Safety, Medicare, and others (relying on the place you reside).

The excellent news is that this can be a shared burden between employers and staff. So, when employers ship these worker payroll slices (taxes) to the federal government, they should dish out further slices of their very own pie too. 

Payroll taxes that each employers and staff pay

You’re in all probability questioning what precisely your tax {dollars} are paying for, and rightfully so. Let’s begin by breaking down a few taxes that employers and staff deal with collectively, each of which fall below the umbrella of our favourite man: FICA. 

Each employers and staff contribute equally to taxes below the Federal Insurance coverage Contributions Act (FICA), supporting the next federal applications:

Social safety tax

Social Safety tax is mainly a monetary security web for retired Individuals. It funds issues like retirement, incapacity, survivor advantages, and supplemental safety revenue for eligible Individuals. 

Medicare tax

As folks become old, well being turns into actually vital, and Medicare makes positive seniors can get the medical care they want. It’s a technique to assist them throughout a time when well being wants usually enhance.

The reality is, nobody is resistant to getting older or sickness, and these applications present the monetary assist wanted to get by means of a few of life’s hardest moments. So, as a lot as we’d like the entire pizza, it’s fairly laborious to argue with that.

Payroll taxes which might be paid by employers

In terms of payroll taxes, employers have the monetary accountability to chip in and assist the neighborhood, making certain the next important applications hold rolling. 

Federal unemployment taxes (FUTA)

This tax is actually a type of insurance coverage that helps assist staff who turn into unemployed by means of no fault of their very own. Employers sometimes should pay a 6% FUTA on the primary $7,000 of every worker’s wages, however you may get a tax credit score as much as 5.4% should you pay on time. So it undoubtedly pays to be organized!

State unemployment taxes

On the state degree, employers additionally chip in for unemployment advantages to make sure monetary help is on the market to staff (inside their state) when wanted.

Any native taxes

Relying on the place you reside, there may be a couple of further taxes for employers to consider. Native taxes fund applications and providers (like training and rubbish assortment) proper in your neighborhood, giving companies an opportunity to present again to the neighborhood that helps them.

These taxes are a technique to actively contribute to the welfare of your staff and the area people, making a optimistic influence the place you’re employed and stay.

Payroll taxes which might be paid by staff

We already know that FICA takes a slice from everybody’s paycheck (to pay for Medicare and Social Safety). However what else are staff on the hook for?

Federal revenue tax

Employers deduct this chunk of taxes from worker paychecks to fund important federal applications like Nationwide Protection, infrastructure, training, and legislation enforcement. Your federal revenue tax charge can fluctuate from 10% as much as 37%, relying in your gross annual revenue.

State revenue taxes

Relying in your state of residence, a portion of your earnings could also be earmarked for state revenue taxes too. State taxes hold your neighborhood operating easily by offering monetary assist for issues like training, healthcare, and public security.

Any native taxes

However wait, there’s extra! Typically you get the pleasure of paying native taxes too. These taxes pay for native applications and providers like parks, libraries, emergency providers, and public transportation—straight impacting the standard of life in your neighborhood. 

Understandably, all of us need our paychecks to be greater, however chipping in a bit to fund applications that profit society’s well-being and improvement doesn’t sound too unhealthy, does it?

All the things it is advisable find out about submitting employer payroll taxes

Whereas it might be tempting to bury your head within the sand in hopes that the legendary tax fairy will rescue you from the complexities of payroll taxes, we suggest a extra proactive method: staying organized. Though not fairly as glamorous as a legendary tax fairy, group is crucial for small companies, notably these coping with quarterly taxes. Why? Properly, because the boss, it’s on you to deal with each your share of payroll taxes and the funds collected out of your staff’s paychecks. This course of requires numerous paperwork and much more group. 

To report wages and taxes, it is advisable full Type 941, each quarter. Then yearly, you’ll full Type 940 for federal unemployment tax and distribute W-2 varieties to your staff.

Now, keep in mind these taxes you withheld out of your staff’s paychecks? Properly, the IRS doesn’t need you retaining these till tax time, so that you’ll should make common tax deposits (together with your share) to the IRS. These deposits are required both month-to-month or bi-weekly, relying in your whole tax legal responsibility. Don’t neglect to test your state and native tax rules too—you may be on the hook for a bit extra dough.

Not precisely an organizational guru like Marie Kondo? No worries. Homebase automates every part, from timesheets to payroll and even taxes. So, you may confidently take a hands-off method to the tediousness of payroll taxes. 

Methods to calculate employer payroll taxes

Now that you just’ve acquired a deal with on the method of submitting employer payroll taxes, it’s time to interrupt down these calculations. As a result of the IRS is nothing if not correct. 

Step 1: Decide tax liabilities

Your online business construction impacts what taxes you pay and when. To stop errors, be sure to know whether or not your online business is a partnership, company, or LLC earlier than going any additional. 

In the event you don’t have already got one, get an Employer Identification Quantity (EIN). You’ll want this for tax functions. 

Decide which taxes (federal, state, and native) apply for your online business and their submitting deadlines, to make sure you don’t face any late penalties. 

Don’t neglect that small companies sometimes should file their federal taxes quarterly (reasonably than yearly), so that you get to do that course of 4 occasions a yr.

Step 2: Decide gross wages on your staff

Collect worker data like Social Safety numbers, submitting statuses, and related tax varieties (like W-4s). 

Decide the overall gross pay for every worker. This contains common wages, bonuses, time beyond regulation pay, and some other types of compensation (like suggestions).

Subtract pre-tax deductions from their gross pay. Frequent pre-tax deductions embody medical insurance and retirement plan contributions. 

When you’ve subtracted pre-tax deductions, you’ll be left with the taxable revenue for every worker. That is the quantity topic to numerous taxes.

Step 3: Calculate worker and employer tax withholdings

Utilizing your staff’ W-4 varieties and IRS withholding tables, calculate federal revenue tax, Social Safety, and Medicare tax withholdings for every worker. 

Then, decide your share of Social Safety and Medicare taxes: Social Safety tax is 6.2% of the worker’s gross wages (as much as a sure restrict), whereas Medicare tax is 1.45% of the overall gross wages.

Relying on the place you reside, there could also be further state unemployment or native taxes to calculate at this stage too.

Step 4: Calculate web pay 

To calculate the web pay for every worker, subtract all withholdings and employer contributions from their gross wages.

Step 5: Full tax varieties and submit funds

Use the next varieties to file quarterly and annual tax experiences: 

  • Type 941 (Employer’s Quarterly Federal Tax Return): Filed each quarter, this way experiences the federal revenue tax, Social Safety, and Medicare taxes that had been withheld.
  • Type 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return): That is an annual report on the federal unemployment tax that employers have to file.
  • W-2 varieties: Given to staff by January 31 every year, this way summarizes their yearly earnings and tax withholdings.
  • W-3 kind: It is a abstract kind for all W-2s despatched to Social Safety.

Submit funds for the taxes you’ve withheld, alongside along with your employer contributions to the proper tax people (federal, state, native) by the deadlines to keep away from any penalties.

Step 6: State and native reporting

Assessment your state and native rules to make sure compliance with tax necessities. This may embody finishing further varieties and submitting separate funds to your state and native tax authorities.

Step 7: Keep up to the mark

Keep knowledgeable about modifications in tax legal guidelines. Ensure you’re updating worker varieties as wanted, particularly the W-4 for adjusting withholding.

Exhausted even occupied with doing that 4 occasions a yr? We don’t blame ya! Even writing out the method was tiring. Fortunately, there’s a technique to automate the entire course of and remove guide calculations (and paperwork) as soon as and for all.

Automate payroll taxes with Homebase

Let’s be trustworthy, even particular person taxes are lots to handle, not to mention dealing with payroll taxes for a whole enterprise. Homebase takes taxes fully off your plate by automating the whole payroll course of, from calculations to submitting. All of it begins with our user-friendly time clock app—which is completely free, by the best way. As your staff punches out and in for his or her shifts (straight from their telephones), Homebase calculates hours, breaks, time beyond regulation, bonuses, commissions, and even suggestions. 

The tedious job of changing timesheets into hours and payroll? Contemplate it executed. Homebase routinely calculates wages and taxes seamlessly, and the most effective half? You possibly can select to ship funds by way of direct deposits or go for the traditional test printing—no matter fits your model. 

However Homebase is about greater than easy comfort; we’re payroll specialists too. Tax filings, 1099s, W-2s, it’s all in a day’s work for us. We’ll even ship funds to the state and the IRS, with out a single click on from you. And, if there are any modifications in federal or state tax legal guidelines, we’ll shoot you a notification, retaining you on the straight and slim.

With easy, computerized submitting Homebase payroll will help you retain your tax tasks straight. Get began