Over 35% of taxes collected by the federal government are in the form of a payroll tax, which helps fund social insurance programs. Most working citizens are subject to the payroll tax, which is normally deducted automatically from an employee’s paycheck. Employers are charged these types of taxes, quite often too.

The vast majority of federal payroll tax proceedings go towards funding Social Security & Medicare:

A few other types of payroll tax also fund a few smaller level programs:

  • Taxes paid by employers also fund the Unemployment Insurance program.
  • Some Retirement Fund Programs for federal employees and railroad workers.

Payroll Tax

The day your first employee gets hired, you become liable for payroll tax. Though payroll tax is not a single tax, just a blanket term used to refer to all taxes charged on the wages of employees.

If you have employees, you are responsible for:

  • Deducting, file taxes, and pay from the employee wages on their behalf,
  • Pay payroll tax on each of your employees out of your own income

So let’s check how to calculate employer payroll taxes (the taxes an employer needs to pay) as well as how much employee tax to remit to the government.

Types of Payroll Tax

There are two types of payroll taxes. One that you have to pay from your revenues, and one is to be collected from employee paychecks and forwarded to the government.

Taxes from Your Revenues

  • FICA Tax: Taxes directed towards the Social Security program were created by the Federal Insurance Contributions Act (FICA) and are levied uniformly on employers & employees on all earnings over a specific level. Medicare taxes for Hospital Insurance (HI) program are also provided in FICA and are levied uniformly on employers & employees on all income. The employer share is 6.2% for social security and 1.45% for Medicare. 
  • FUTA Tax: Only to be paid by employers, FUTA (Federal Unemployment Tax Act) taxes support funding for state-administered unemployment insurance programs. This covers unemployment insurance. The total rate is 6.0%, for the first $7,000 of earned income per employee. However, most states provide a credit of 5.4%, meaning most employers only pay 0.6%.

Taxes to Collect and Remit

  • Federal income taxes
  • State and local taxes

These we are discussing in detail here because it’s the most common question.

How much Federal Income Tax is to be Withheld

As an employer, you need to withhold income tax on behalf of your employees and then remit them quarterly to federal, state, and local tax authorities.

To calculate how much of your employee’s federal income tax to withhold, you’ll need to generate a copy of their Form W-4 and your employee’s gross pay.

The next step is to decide on the method you want to use to calculate withholding. Mostly two options are in use, the wage bracket method and the percentage method. While not exactly easy, the wage bracket rule is a more straightforward way to assess payroll tax.

Wage Bracket Method to Calculate Federal Income Tax Withholding

  1. As per IRS Publication 15-A, find the tables marked “Wage Bracket Percentage Method Tables.” Use them according to your employee’s pay period.
  2. Review Form W-4 to learn whether the employee files income tax as married or single and the number of allowances claim by them.
  3. Obtain the employee’s gross wage for the pay period in columns A and B. The wage should exceed the amount given in column A but lower than the column B amount.
  4. Subtract the amount given in column C.
  5. Multiply the outcome by the percentage in Column D.
  6. Check Form W-4 to determine if any additional tax withholding has been requested by the employee. If yes, add that amount to the final number.
  7. You have derived at the amount to be withheld from the employee’s paycheck for that pay period.

**Source: IRS Publication 15-A

The Percentage Method is far more complex—not advisable if you’re doing this by yourself. To know about the Percentage Method in compliance with IRS, read about both methods in IRS Publication 15-A.

Once the income tax to be withheld from your employees’ paychecks has been ascertained, the next step is to figure out how much FICA to withhold, and how much you’ll need to pay on their behalf.

Calculating FICA

FICA is short for the “Federal Insurance Contributions Act.” A mandatory payroll tax deduction used to fund programs like Social Security (disability insurance, old age, survivors) and Medicare (covering health insurance for folks aged over 65).

For FICA, your employee pays 50% from their paycheck. And you, the employer, pay 50% out of your own revenue. As an employer, you are required to withhold and pay the amount to be deducted from your employee’s paycheck, and remit those funds on their behalf.

FICA tax rates

Currently, the tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% in total. Medicare rate is 1.45% for the employer and 1.45% for the employee. Or 2.9% in total.

Combined, the total FICA tax is 15.3% of the employee’s wages.

Do any of your employees earn over $137,700? If yes, the rules are a little different. Check the IRS website to know more.

How to Calculate FICA Payroll Tax 

Social Security Withholding

To determine Social Security withholding, multiply your employee’s gross salary for the current financial year by the current Social Security tax rate (6.2%).

This is the amount you will deduct from your employee’s paycheck and remit along with your payroll tax.

For instance, your employee’s gross pay for the current pay period is $5,000. So deduct .062×5000 or $310 from employee’s pay check.

Medicare withholding

To assess the amount to be withheld for Medicare, multiply your employee’s gross pay by the current Medicare tax rate (1.45%).

In the above example, $5,000x.0145 (current Medicare tax rate) or $72.50 Medicare tax to be deducted from the employee’s paycheck.

Employer Matching

As an employer, you are bound to match what your employees pay in FICA taxes. So, in the above example, you would remit $310 for Social Security tax and $72.50 for Medicare tax, as well, out of your revenues.

Calculating FUTA

FUTA is an employer-paid payroll tax that funds state unemployment agencies.

The current FUTA tax rate is 6% on the first $7,000 of wages paid to employees in the calendar year. However, the actual rate, in most States, that an employer pays is actually 0.6%, because each State gets a credit to meet the remaining 5.4% of FUTA payments. Though some states are ineligible for the full credit. 

FICA vs FUTA

While FICA is a payroll tax contributions to Social Security and Medicare, FUTA is an employer-paid payroll tax to fund state workforce agencies and unemployment insurance. The format specified for each is also different.

FICA is to be reported on Form 940 – Employer’s Annual Federal Unemployment Tax Return at the end of the financial year. While FUTA is filed using Form 941 – Employer’s Quarterly Federal Tax Return, quarterly.

How to Pay your Payroll Tax

The calculation part of the payroll taxes is the difficult part. Paying them is easy. There is only one way to pay your payroll tax. That is the Electronic Federal Tax Payment System (EFTPS). You need to enroll yourself and make your payment online. No check payments are accepted.

State and Local Payroll Tax

Employers also have to pay the state and local (city, county, etc.) payroll tax on behalf of employees. Similar to the federal payroll tax, part of this tax is paid by the employer and part of the employee. The part paid by the employee is to be withheld by the employer, from the employee’s paycheck, and then remit it as payroll taxes.

In addition to State payroll tax (State Unemployment Tax, or SUTA), employers are also liable to remit State income tax on behalf of their employees.

State and local payroll taxes are supervised at the State and local level, and tax rules for each are different. 

Self-Employment Tax

If you are operating a small business, all by yourself and you have not hired any employees, you’ll still have to remit payroll taxes—for yourself. This is called self-employment tax, and is, rather, Medicare plus Social Security for yourself (amounting to 15.3% of your net business income).

Outsourcing Payroll Tax

Calculation of the payroll tax is a complicated process. And penalties, on even common taxation errors, are steep. A 2% penalty will get charged, straight-away, if the payment is delayed by even a day. And the penalty may rise to as high as 15% for past due to payroll taxes. Therefore, it is highly advised to outsource your payroll, if not all tax filing. 

In fact, outsourcing for bookkeeping services is also advisable. Especially recommended for small business owners who would prefer to use their time saved from such outsourcing to grow their businesses. Do get in touch with AutoFilings, rest assured of good quality services, and take your business to new heights.

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Frequently Asked Questions

What Is Payroll Tax?
What are the Current Payroll Tax Rates?
How much is to be paid by the employer in Payroll Taxes for an employee?
How to calculate my employee’s Payroll Taxes?
When to pay Payroll Taxes?
How to pay Payroll Taxes to the IRS?