How do I calculate payroll tax implies that it is a single tax. Payroll tax is an umbrella term covering all the taxes paid on the wages of your employees. It doesn’t matter if you have 1 or 100 employees, payroll taxes are a part of your business expenses.
What is Payroll Tax?
Payroll taxes are taxes paid on wages and salaries and benefit programs such as Medicare and Social Security. If you have employees, your responsibilities are two-fold.
- You are responsible for deducting a portion of their wages to pay certain taxes ‘for them.’
- The business pays the payroll taxes on each employee from the company’s revenue.
As we said, the payroll tax is not a single tax, but a group of taxes that are either paid by you or your business and the taxes you collect from your employees to pay the government.
Components of payroll tax
Federal income tax. To calculate the withholding amount of each employee’s federal income tax, you’ll need to refer to their Form W-4, as well as your employee’s gross pay. The Employer’s Supplemental Tax Guide is a comprehensive guide for employers to calculate federal tax withholding using the Wage Bracket Method.
State and local payroll tax. State and local payroll taxes are determined and governed by those authorities. The employer pays these taxes with the withholdings from the employee’s paychecks. Visit the New York State Department of Tax and Finance for withholding requirements. For other state and local information, visit the Federation of Tax Administrators.
SUTA. The state unemployment tax, also called SUTA, is a payroll tax that businesses pay into the state unemployment benefits fund. If an employee gets laid off and looks to collect state unemployment insurance, the State Unemployment Tax Act (SUTA) fund will make the payments to the employee.
FUTA. FUTA is the Federal Unemployment Tax Act fund, a payroll tax paid to the federal government to fund unemployment insurance. FUTA tax rate is 6% calculated on the initial $7,000 of wages paid in a calendar year. Employers pay 0.6% because of an adjustment the state receives to account for the remaining 5.4%. Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return.
FICA and Medicare
FICA and Medicare withholding. FICA is Social Security withholdings and is calculated at 6.2% for the employer and 6.2% for each employee, with a total of 12.4%. The current rate for Medicare 1.45% for the employer and 1.45% for the employee, for a total of 2.9%. The combined rate is 15.3% of the employee’s wages. The IRS applies different rates based on the employee’s wages. Visit the IRS website on withholding rates to learn more.
The IRS explains further, Additional Medicare Tax Withholding Rate
Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and continues to withhold it each pay period until the end of the calendar year. There’s no employer match for Additional Medicare Tax. For more information, see the Instructions for Form 8959 and Questions and Answers for the Additional Medicare Tax.
I don’t have any employees
Many small businesses and solopreneurs do not have any employees but themselves. Yet, you are still an employee and must remit payroll taxes. In this scenario, the taxes are called self-employment taxes, and it is a combination of Social Security and Medicare taxes.
The payroll tax rate for self-employment is 15.3%. The self-employment rate is the sum of 12.4% for Social Security and 2.9% for Medicare. Self-employment tax is based on net earnings, or in other words, profit.
Please note self-employment tax is DIFFERENT from income tax.
Don’t get caught paying penalties and late fees!
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