The moment you employ your first employee, you are responsible for filing payroll taxes. And yes, this also includes whether you, yourself are your only employee! It is also true that when the word tax comes in the picture, our first instinct is to stick to deadlines and to have an error-free filing!
If you are running a small enterprise and are wondering what payroll taxes are and how to calculate them? So that you can reach your tax goal of compliance, then you have come to the right place! In this article, we will talk about all that there is to know about Payroll taxes.
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What Are Payroll Taxes?
Payroll Taxes are not a single tax, rather they are a group of different taxes that the employer pays from the wages of employees. They are based on two basic responsibilities of the employer:
- Deductions from an employee’s wages, to file and pay taxes on their behalf.
- Paying corresponding payroll taxes accounting each of your employees from your own revenue.
This payroll tax is used to pay the employees’ income tax and to fund social programs such as social security and Medicare.
What Are the Taxes Comprising the Payroll Tax?
As we said before, the payroll tax is not a single tax, but rather an umbrella term used to refer to many taxes. These are:
- Federal Income Tax (Paid by the employee)
- State Income Tax (exempted in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington D.C., Wyoming.)
- Local Taxes (Used to fund local programs and can be paid either by the employee or the employer.)
- Federal Insurance Contributors Act (FICA): This is the federal law that compels employers to withhold specific taxes from the employees’ wages for Social Security and Medicare. ( Split 50/50 between the employee and the employer)
- Federal Unemployment Tax Act (FUTA): This payroll tax goes to fund the federal level state unemployment insurance programs. In case the state is experiencing a high rate of unemployment and needs to borrow money, then they can do so from the federal unemployment fund. (Paid by the Employer)
- State Unemployment Tax Act (SUTA): This is the payroll tax that is collected at the state level, to fund the unemployment insurance benefits to workers. (Paid by the employer in most states)
- State Disability Insurance (Paid by either of the parties or both)
- Workers’ Compensation (This is a state tax levied on the employer)
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What Is The Rate Of Payroll Taxes?
Payroll Taxes do not have a fixed rate as well as any fixed percentage of deduction from the paycheck when it comes to a definite payroll tax calculator. This is because every employee is expected to fill the W-4 form (Employee’s Withholding Allowance Certificate) at the time of hiring.
This form gives information such as the employee’s marital status, number of children (dependents) and their gross salary. These together determine the amount of federal income taxes that deduct-out of an employee’s check.
But, in a payroll tax calculator, the following have a fixed amount:
- Social Security Tax: The fixed rate of which is 12.4%. (Both the employer and the employee pay 6.2% each). Although there is a wage base limit on this tax; the maximum income that can be subjected to this is $128,400 (2018).
- Medicare Tax: The fixed rate of this is at 2.9%, (where both the employer and the employee pay 1.45%). When it comes to a wage limit, there isn’t any set for Medicare, however, an extra 9% is held if the employee is making an excess of $200,000 per year. In this case, the employer does not have to share this extra tax, it is paid only by the employee.
- FUTA: The fixed rate for this is 6% and is applicable only to the first $7,000 in earnings an employee makes in every tax year.
Payroll Tax Calculator Using the Wage Bracket Method:
As we had mentioned before, as an employer, you withhold income tax on behalf of your employees and file it to the authorities it is meant to be submitted to. In this section with the help of a payroll withholding calculator, we will see the implementation of the wage bracket method.
An accurate payroll tax calculator would first require you to have a copy of your employee’s Form W-4, their payroll period as well as their gross pay.
The method that we will be used to calculate payroll taxes will be the wage bracket method.
Steps to calculate the Payroll Taxes:
- In the IRS Publication 15-A, locate the tables marked as “Wage Bracket Percentage Tables”. You will be needing this table coupled with the employee’s pay period.
- Assess the form W-4 to determine the marital status with which the employee files their income tax, ex: married or single.
- Calculate the employee’s gross wage for the payroll period in the separate columns A and B. Take note, that the wages should be over the amount found in column A and under the amount found in Column B.
- You now require to subtract the amount found in column C.
- You need to multiply the result with the percentage in Column D.
- Check the form W-4 to determine if the employee has specifically requested for additional tax being withheld from every paycheck. In case, this is the scenario, you will need to add that amount to the final number.
- The end result using this payroll withhold calculator is the amount you should be withholding from the employee’s paycheck for that payroll cycle.
The Payroll Tax Calculator While Calculating FICA:
This mandatory payroll tax deduction is used to fund programs like social security and Medicare. We have already spoken about the current FICA tax rates above.
But, please take note that the rules are different if your employees are making over $128,400 a year.
These are the way in which a payroll tax calculator assesses the social security holding and the Medicare calculations.
Social Security Withholding:
This payroll withhold calculator works by multiplying your employee’s gross pay for the current payroll period by the current Social security tax rate (i.e 6.2%).
This is the amount that needs to be deducted from your employee’s paycheck and canceled along with your payroll taxes.
To calculate the Medicare withholding, you are required to multiply your employee’s gross pay by the current Medicare tax rate (i.e 1.45%)
Common Questions While Calculating Payroll Taxes:
Here are some of the common questions that can come to your mind when you are calculating payroll taxes. Read on, to get clarity and be tax compliant this season!
In the instances as such, is the individual responsible for the operations of the business?
One also needs to check whether there are written contracts or employee type benefits.
Payroll taxes are an important employer obligation to comply with, from the second you start your business. From the time you employ your first employee, to if you are your only workforce; it is applicable nonetheless.
Any payroll tax calculator can give you an estimation of payroll, but what it is based on is the state that you are operating in and the structure of the Form W4 submitted by your employee.
It is also imperative to see the number of umbrella taxes that formulate payroll taxes.
In order to have a faster and more efficient alternative to doing all this by yourself, you should outsource these payroll processing services so that you can focus on the core operations of your business.
Our team of technicians offers expert payroll processing services so that you are able to concentrate on its expansion and growth. For any payroll or bookkeeping related queries you can contact our team on our toll-free number +1-866-301-2307.