Don’t you just love talking about taxes? Probably not, but if you’re reading this article it’s probably because you need to understand and learn about payroll taxes. Perhaps you run a small business and have just hired or are considering hiring your first employees.
Although paying taxes can feel about as pleasant as getting your teeth pulled, payroll taxes are a vital part to running a business and having employees.
What are payroll taxes?
The term “payroll tax” refers to all the taxes you as an employer pay and/or deduct from your employees paycheck based on their wage or salary. The taxes included under that umbrella are Social Security Tax, State and Federal Taxes, Medicare Taxes as well as State and Federal Unemployment Taxes.
Here is a breakdown of what makes up payroll taxes:
Social Security Tax
Social security taxes pay for the retirement and disability benefits of the American people.
In general, Medicare taxes cover all persons 65 years of age or older who have been legal residents of the United States for at least 5 years. It also covers people with disabilities under 65 if they receive Social Security Disability Insurance (SSDI) benefits. Again, both employers and employees pay this tax.
State Income Taxes
State income taxes are decided by each state. Seven states currently do not have an income tax.
For states that do have income tax, the rate is decided by that state as well as what parameters it encompasses. As an employer you are required to withhold these taxes based on the W2 form your employee fills out. You deduct the taxes from your employee’s check and send the money to the state.
Federal Income Taxes
Federal income taxes are taken across the country and different rates depending on income levels. These taxes encompass all forms of income/earning made by the taxpayer. This includes income, capital gains, dividends, interest, etc. Again, as the employer you are required to withhold these taxes based on what your employee claims on their W2 form they filled out their new hire paperwork. You do not pay these taxes but rather deduct the money from your employee’s check and send it to the IRS.
State and Federal Unemployment Taxes
Unemployment taxes are calculated based on a variety of factors. Those factors include how old your business is, how much you pay your employees, the type of business you are as well as how many unemployment claims have been filed against your business. These taxes go to help pay the unemployment benefits a previous employee may file for upon losing their job at your company. The more unemployment claims you have, the higher your tax rate. Only you as the employer pay this. It should not be withheld from their wages.
Other Payroll Withholdings to Consider
These withholdings are voluntary and directed by the employee, if you choose to offer these options:
- Charitable contributions
- Insurance premiums
- 401(k) and 403(b) contributions
- U.S. savings bonds purchases
- Payments owed to the company for the purchase of company merchandise
While taxes are not the most fun thing to think, read, or talk about, they are extremely important in having a healthy, legal and successful business. Do your homework. Know what you need to know. Hire someone to handle your payroll if it feels too overwhelming. It’s a good idea to leave these kinds of things up to the experts so you have peace of mind and can spend your time doing what you do best; running your business.
This blog post is intended for informational purposes only and does not constitute legal advice. No attorney-client relationship is created between the author and reader of this blog post, and its content should not be relied upon as legal advice. Readers are urged to consult legal counsel when seeking legal advice.
Whether you are hiring your first employee or additional employees, you’ll need to get your paperwork, payroll in order. Check out our guide to payroll for business owners!