Understanding Payroll Taxes for Small Businesses

small business owner calculating payroll taxes on tablet

 The information in this article is up to date through tax year 2019 (taxes filed in 2020).

Payroll taxes are one of the many responsibilities and obligations small business owners have to deal with. What are they, and how do you pay for them?

What are payroll taxes?

Payroll taxes are federal taxes paid by the employer and employee to fund government programs including Social Security, Medicare and unemployment compensation. It’s your responsibility as a business owner to withhold these taxes from your employees’ paychecks and send them to the IRS on their behalf.

Types of payroll taxes

Federal Income Tax: You pay these taxes on your employees’ behalf by withholding anywhere between 10% and 37% from their paychecks. The amount you send to the IRS depends on their income and filing status.

FICA Taxes: FICA, which stands for Federal Insurance Contributions Act, is made up of three different taxes:

  • Social Security Tax: Both you and your employees are required to pay the Social Security tax. The total percentage that’s sent to the IRS is 12.4%, but it’s split between you and your employees. You withhold 6.2% of your employees’ paychecks, while you match the other 6.2%. As of 2019, $132,900 is the maximum amount of income that can be taxed for Social Security.
  • Medicare Tax: There’s a flat rate of 2.9% for the Medicare tax. Just like the Social Security tax, you and your employees are obligated to pay it. You take 1.45% out of your employees’ wages and you pay the other 1.45%. Unlike Social Security tax, there’s no cap on the amount of income that can be taxed.
  • Additional Medicare Tax: If you or an employee’s income exceeds a certain amount, an additional 0.9% Medicare tax will be imposed on your earnings. Here are the threshold amounts:
    • $250,000 – Married filing jointly
    • $200,000 – Single, head of household, qualifying widow(er) with dependent child
    • $125,000 – Married filing separately

Federal Unemployment Tax Act: The Federal Unemployment Tax Act – also known as FUTA – is a tax used to fund unemployment compensation programs. For FUTA, an employer must pay 6% on the first $7,000 of an employee’s wage. However, employers who pay their SUTA (State Unemployment Tax Act) tax on time and in full can receive a 5.4% credit reduction on their FUTA tax, dropping the rate to 0.6%.

How to calculate and pay payroll taxes

First, you need to calculate the amounts of federal income and FICA taxes that need to be withheld from your employees’ paychecks. Then, calculate the amount you, as a small business owner, need to pay for FICA taxes. Depending on how many employees are on your payroll, you will make payments to the IRS either on a monthly or semi-weekly basis. You report FICA and federal income taxes on Form 941.

For the FUTA tax, it must be paid on a quarterly basis and reported annually on Form 940. However, if your yearly FUTA tax liability is less than $500, you can include your FUTA tax payments along with Form 940.

When it comes to managing your payroll taxes, Workful is an easy solution for your small business. You can easily track state and federal taxes, file forms and run payroll – all while eliminating hassles and potential IRS penalties.

This article is intended to provide general information to the public and does not provide personalized tax, investment, legal, or business advice. You should seek the assistance of a professional for advice on taxes, investments, and any other financial, legal, or business matter pertinent to your individual situation.

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