Payroll Taxes meaning
A payroll tax is a tax on the wages or salary of a person that is paid to the government. An employer will withhold the amount from an employee’s pay and pay the government on their behalf. Even if your business does not have any employees, payroll taxes still need to be paid for yourself, although in this case, it is referred to as self-employment tax. This article will focus on payroll taxes for businesses with employees.Two Types of Payroll Taxes
There are two types of payroll taxes, employee and employer. Employee payroll taxes are the taxes an employer withholds from the employee’s pay and sends to the government on their behalf. Employer payroll taxes are the taxes that come out of the employer’s pocket and are paid to the government.What taxes do Employers Pay? | What taxes do Employees Pay? |
FICA – Social Security and Medicare | FICA – Social Security and Medicare |
FUTA – Federal Unemployment Taxes | Federal Income Taxes |
SUTA – State Unemployment Taxes | State Income Taxes |
Local taxes for employers | Local taxes for employees |
FICA taxes and Process of calculating them
The Federal Insurance Contributions Act (FICA) is the payroll tax that you must pay to the government for social health programs (like Medicare and Social Security). The FICA tax is split equally between employer and employee, meaning the amount you pull out of an employee’s paycheck to send in is the same exact amount that you will pay out of pocket. Currently, the tax rate is as follows:Employers | Employees | |
Social Security | 6.2% on the first $147,000 of earnings | 6.2% on the first $147,000 of earnings |
Medicare | 1.45% | 1.45% |
Total | 7.65% | 7.65% |
Social Security | $450 x .062 = $27.90 |
Medicare | $450 x .0145 = $6.53 |
Employer Pays: | Employee Pays | |
Total FICA taxes for the period (in this example) | $34.43 (27.90 + 6.53) | $34.43 (27.90 + 6.53) |
FUTA & SUTA taxes
Both the FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) are payroll taxes that an employer must pay. While the SUTA tax rate varies greatly for each state, the FUTA tax rate is 6% and is only paid on the first $7,000 an employee earns per year. However, you could pay as little as 0.6% after receiving certain state credits.Difference between FICA and FUTA taxes
As we went over earlier, FICA taxes fund Social Security and Medicare programs. FUTA taxes are used to fund unemployment programs. – /wp:paragraph –> As we went over earlier, FICA taxes fund Social Security and Medicare programs. FUTA taxes are used to fund unemployment programs. Also, to file FICA taxes you will use form 941. This is due on the last day of the month of each quarter. To file FUTA taxes, you will use form 940. The due date for this is January 31st. We’ve gone over the taxes an employer has to pay out of pocket (except state and local taxes, as those vary depending on where your business is located), so let’s finish up looking at what you must withhold from your employee’s pay.How do you calculate the federal income tax amount?
We’ve gone over some of the taxes you must withhold from your employee’s paycheck (FICA taxes), now let’s dive into figuring out how much federal income tax to withhold. First, your employee will need to fill out a W-4 form. This form was redesigned in 2020, so the process is a little different depending on which version of the form the employee uses. Next, you will need to know the gross pay of your employee. Two methods are typically used. The Wage Bracket Method and the Percentage Method. As many business owners will tell you, the Wage Bracket Method is the easiest method of the two. Due to it being easier to understand, we will be using the Wage Bracket Method for this article. Using IRS Publication 15-T, you will locate the Wage Bracket Method tables. There are two separate sections depending on which version of the W-4 form was used. Here are the steps to fill out the worksheet to determine the amount to withhold from your employee’s wages.Wage Bracket Method: Employees using a Form W-4 from 2019 or earlier | |
1 | Locate the applicable worksheet for the version of Form W-4 used by your employee. |
2 | See if your employee indicated they file as single or married on the W-4 and the number of allowances they claim. |
3 | Enter the employee’s total taxable wages for the payroll period on line 1a of the worksheet. |
4 | Take the amount on line 1a and the number of allowances listed on the W-4 to look up the Tentative Withholding Amount listed in the table based on the payroll frequency (weekly, biweekly, etc.). Enter this amount on line 1b. |
5 | Enter any additional amount to be withheld (listed on the W-4) on line 2a. |
6 | Add lines 1b and 2a, and record it into line 2b. This is the amount to withhold from your employee’s pay for the period. |
Wage Bracket Method: Employees using a Form W-4 from 2020 or later | |
1 | Locate the applicable worksheet for the version of Form W-4 used by your employee. |
2 | See if your employee indicated they file as single or married on the W-4 and the number of allowances they claim. |
3 | Enter the employee’s total taxable wages for the payroll period on line 1a of the worksheet. |
4 | Enter the number of pay periods per year on line 1b (using Table 5). |
5 | Enter the other income amount from Step 4a of the W-4 into line 1c. |
6 | Divide the amount on line 1c by the number on line 1b, and enter this amount on line 1d. |
7 | Add lines 1a and 1d, and enter this amount on line 1e. |
8 | Enter the amount listed on step 4b of the employee’s W-4 on line 1f. |
9 | Divide the amount on line 1f by line 1b, and enter it on line 1g. |
10 | Subtract line 1g from line 1e, and enter it on line 1h. (If it is negative, enter zero.) |
11 | Use the amount on line 1h to look up the Tentative Withholding Amount listed in the table based on the payroll frequency, the employee’s filing status, and whether the employee checked the box in Step 2 of the W-4. Enter this amount on line 2a. |
12 | If there is an amount listed on step 3 of the W-4, enter it on line 3a and divide that amount by the number in line 1b, this amount goes on line 3b. Subtract line 3b from line 2a. (If it is negative, enter zero.) Enter this amount on line 3c. If step 3 is not filled out on the W-4, enter the amount from line 2a on line 3c. |
13 | Enter the amount listed on step 4c of the W-4 on line 4a. Add lines 3c and 4a, and enter it on line 4b. This is the amount to withhold from your employee’s pay for the period. |