We’ve all gotten that little piece of paper that accompanies our checks each month. As a business owner, you’re responsible for putting together pay stubs and summarizing the withholdings. The three taxes include The Federal Insurance Contribution Act, which makes up FICA taxes while The Federal Unemployment Tax Act makes up FUTA taxes.
Then there’s The State Unemployment tax act or SUTA taxes. Depending on the employee’s earnings you have you may be responsible for a portion of these combined taxes each month or quarter.
Below we’ll take a look at payroll taxes and break down what they are and your obligations as an employer to pay them.
What is payroll tax?
Payroll taxes (employment taxes) are the taxes businesses pay on employees’ wages. They consist of FICA, SUTA, and FUTA taxes.
- FICA taxes: Employers pay these Social Security and Medicare taxes from their profits while employees pay from their paychecks.
- FUTA taxes: Employers are solely responsible to pay these federal unemployment taxes.
- SUTA taxes: Both employers and employees pay for these state unemployment taxes, depending on the situation.
Who pays payroll taxes?
For FICA taxes, both employees and employers pay their share. Depending on the classification of the worker, you as the business owner may pay half or none at all. If you employ a(n):
- Traditional worker who receives a W-2 form, you each pay half of the 15.3% (7.65%).
- Independent contractor, you as the employer don’t pay any payroll taxes. Since an independent contractor is self-employed, they pay their full 15.3% self-employment tax.
For FUTA taxes, the business owner (you) pays the full amount with no assistance from the employee.
For SUTA taxes, the payer is dependent on the state requirements. For example, states like New Jersey require that the employer and employee both pay SUTA taxes.
How much is payroll tax?
Payroll tax rates can vary depending on the classification of the employee as well as tax credits you may receive as an employer. Let’s look at these instances separately for FICA, SUTA, and FUTA taxes.
FICA taxes:
The grand total for FICA payroll tax is 15.3%. If you have a traditional employee or statutory employee, you are responsible for 7.65% (half) with the other half being the responsibility of the employee. If you have self-employed people, they are responsible for the full 15.3% without any contributions from the business.
FUTA taxes:
FUTA payroll taxes are the sole responsibility of the business owner. The cost is $420 per employee annually—specifically, 6% of the first $7,000 you pay to each employee per year.
However, there is a tax credit available for paying your state unemployment taxes (SUTA taxes). This tax credit can be up to 5.4% which in turn then makes your FUTA tax rate .6%. This can be achieved by filing form 940 which we’ll discuss later. Generally, everyone who qualifies for the SUTA tax also receives this tax break.
SUTA taxes:
SUTA taxes aren’t as streamlined across the board as FUTA and FICA taxes. Since SUTA is a state-mandated tax, each state has its own tax range. Check with your state workforce commission for your range, if any.
What are payroll taxes levied on?
The federal government levies payroll taxes on all wages that self-employed individuals and traditional employees earn. This means the federal government places a tax on any earned income during the year.
This money is used to fund multiple other government programs which we’ll discuss below.
What do payroll taxes help fund?
Payroll taxes are put in place to help fund unemployment, social security benefits, and Medicare contributions. Everyone who earns a salary or wage—no matter the amount—is subject to pay into these contributions. Here’s how they split income taxes:
- Social Security contributions: 12.4% total (6.2% from the employer and 6.2% from the employee)
- Medicare contributions: 2.9% total (1.45% from the employer and 1.45% from the employee)
- Unemployment contributions: Up to 6% of the first $7,000 (this is entirely paid by the employer)
Filing payroll taxes as a business owner
Business owners are responsible for reporting federal and state taxes post-payroll, depending on the tax deposit date. These tax forms include:
- Federal tax deposits
- FUTA tax deposits
- Form 941
- Form 940
You need to complete your federal taxes using The Electronic Federal Tax Payment System (EFTPS). Here, you will make an electronic payment using three pieces of identification:
- Taxpayer identification number (TIN, EIN, or SSN)
- Personal identification number (PIN)
- Internet password
Federal tax deposits
Federal tax deposits are your FICA tax deposits and you are required to pay them either monthly, semi-weekly, or the next day, depending on your pre-determined tax deposit date. Here’s how the IRS will categorize you:
- Monthly: If you report $50,000 or less in taxes you will contribute monthly. Make these payments by the 15th of each month for the previous month’s payment.
- Semi-weekly: If you report more than $50,000 in taxes, you will be a semi-weekly contributor (every other week). Here’s the breakdown:
- Payments made on Wednesday, Thursday, or Friday must be paid by the following Wednesday.
- Payments made on Saturday, Sunday, Monday, or Tuesday must be paid by the following Friday
- Next-Day: If you have $100,000 or more in taxes on any day you must make a deposit by the next business day.
FUTA tax deposits
FUTA taxes (unemployment taxes) are only made on a quarterly basis to the IRS. However, if your FUTA tax contributions are less than $500, then you roll them over to the next quarter and pay biannually.
If you’re in the last quarter of the year and you still haven’t hit $500, use Form 940 to pay the tax by January 31.
Form 941 and Form 940
In addition to paying the FICA and FUTA tax deposits electronically, you also need to report your taxes on Forms 941 and 940.
- Form 941 is for your quarterly federal tax return for your FICA taxes. You will fill out and submit a Form 941 for each quarter summing all of your FICA taxes paid within those months.
- Form 940 is for your annual federal unemployment (FUTA) tax return. You will fill out and submit Form 940 annually summing all of your FUTA tax contributions for the previous year.
While we suggest you also file these forms electronically, we’ll include the charts of where to manually file these forms based on what state you reside in below.
Payroll tax example
Let’s say you are a small business owner trying to calculate payroll taxes for your company. Let’s look at three different employee types and how you would tax them.
Employee type 1 – Traditional employee
This employee is a traditional employee who receives a W-2 at the end of the year. Because they are a W-2 employee, they are eligible for partial assistance with their FICA taxes as well as full assistance with FUTA taxes. The breakdown looks like this:
Total income for 2021 = $ 25,000
Employee tax (FICA):
$25,000 x 15.3% = $3,825
7.65% paid by the employer = $1,912.50
7.65% paid by the employee = $1,912.50
FUTA tax for one employee
$7,000 x 6% = $420 paid by the employer
Total taxes you pay: $2,332.50
- FICA = $1,912.50
- FUTA = $420
Total taxes the employee pays: $1,912.50
- FICA = $1,912.50
Employee type 2 – Statutory employee
This employee is not a traditional employee, however, they still receive a W-2 and the same tax benefits of a traditional employee. The only difference is that statutory employees don’t receive benefits like 401(k) contributions and health benefits. So this employee breakdown will look like this:
Total income for 2021 = $ 25,000
FICA taxes for 2021:
$25,000 x 15.3% = $3,825
7.65% paid by you = $1,912.5
7.65% paid by the employee = $1,912.5
FUTA taxes for 2021:
$7,000 x 6% = $420 paid by the employer
Total taxes you pay: $2,332.50
- FICA = $1,912.50
- FUTA = $420
Total taxes employees pay: $1,912.50
- FICA = $1,912.50
Employee type 3 – Independent contractor
Self-employed contractors don’t receive a W-2 or tax benefits from you (the employer). Instead, independent contractors are responsible for the full 15.3% of FICA taxes and receive no FUTA benefits. Here is what the tax payment breakdown will look like:
Total income for 2021 = $ 25,000
FICA taxes for 2021:
$25,000 x 15.3% = $3,825
Total taxes you pay: $0
- FICA = $0
- FUTA = $0
Total taxes the employee pays: $3,825
- FICA = $3,825
What is the difference between payroll and federal income taxes?
Payroll taxes fund two programs (the Social Security Administration and Medicare). Federal income taxes are a general fund for the federal government that they can use at their discretion.
Everyone pays the same percentage of payroll taxes but local income taxes depend on the amount you earn and can increase or decrease yearly.
What is the limit on earning for social security payroll tax?
For social security payroll taxes, the maximum taxable wage is $147,000. Unlike social security taxes, which are eligible for a wage base limit, the additional Medicare tax has no wage base limit. This means that all wages are subject to Medicare taxes
The purpose of payroll taxes
Payroll taxes play a big role in our government’s program contributions. By everyone, both employees and employers, making their contribution to payroll taxes we can ensure basic benefits such as social security, medicare, and unemployment for all workers.
Related:
- How to create a website for my business: 8 steps and tips
- How to start an e-commerce business and succeed in 2023
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
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5 tips for organic business growth
It’s no secret that startups have a prodigious failure rate. In fact, according to a recent Entrepreneur.com study, the four-year survival rate for a startup is just 49%.
With demoralizing stats like this in mind, entrepreneurs may be tempted to grow their profits through any means necessary, including inorganic strategies like acquisitions or mergers. However, the truth is that business owners can achieve impressive growth through organic strategies as well, allowing them to retain control of the companies they built from the ground up.
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Also known as “true growth,” organic growth refers to the process of growing a business by reducing costs and increasing sales, either by finding more customers or enhancing output to current clients. On the other hand, inorganic growth occurs when a company merges with or is acquired by a second business. Entrepreneurs should take the time to familiarize themselves with the advantages of organic and inorganic growth, as well as some of the top strategies for execution, so they can decide which is the best choice for their business.
As a new business owner, you’ll likely want to increase profits as quickly as possible. By employing inorganic strategies like mergers and acquisitions, startups can grow their businesses more quickly while taking advantage of resources such as stronger credit lines and expanded market resources. Additionally, joining with another company lets you take advantage of its expertise and experience in the industry to develop your own brand.
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By merging with another business, you agree to hand over some of your control and equity to another company. Not only can your initial vision become diluted, but you may also be forced to take on new business and managerial challenges before you’re truly ready. In some cases, you may have to rush to grow your staff and production capabilities to keep up with demand.
On the other hand, organic growth techniques allow you to grow your business on your own timeline. Because you aren’t sharing control with another company, you can hire employees and expand sales at your own pace. Additionally, entrepreneurs who maintain their autonomy now can sell for a larger profit later when the company is fully developed.
While retaining control of your company offers many advantages over the long haul, it can make business growth challenging in the short term. Some entrepreneurs struggle to grow beyond their current marketplace, while others find themselves cut down by the competition. Additionally, new businesses must often fight to make ends meet from month to month. Fortunately, strategies exist to help startups grow their profits without handing over control to partners or investors.
Here are just a few of those strategies to help you grow your business organically:
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Want to grow a business that will feed your family and employees for years to come? The first step on the road to entrepreneurial success is starting the right kind of company.
With home-based and e-commerce businesses, you can avoid expenses like rent and commuting during the early, lean years of your company. As an added bonus, working out of the home lets you write off parts of your mortgage and electric bill. You can then invest these savings back into the business to help you grow in the long term.
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A common conundrum for new business owners is whether to take your full cut of the profits or invest the money back into your company. While you may be tempted to keep some of those hard-earned dollars for yourself, you should aim to reinvest gross profits whenever possible to help your business grow. Investing your own money shows prospective clients and lenders that you are confident in your company’s long-term potential.
Not sure where to put profits? When in doubt, invest in marketing, SEO and other tactics likely to generate more business for your startup. If your income permits it, you may also want to invest in employee training and technological improvements, as these can yield large profits down the line for your company.
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No matter how happy your current clients are with your offerings, you will have trouble growing your business organically if you don’t put effort into finding new sales channels. If you don’t currently sell your goods online, you should definitely consider starting a website to expand your reach to other regions. Additionally, you can introduce new products, cross-market services to your existing clients and expand to different markets. For example, a company that specializes in SEO may want to expand its services to include social media and search engine marketing.
Finally, business owners should employ market segmentation to customize their strategies according to the specific channels they are leveraging and the specific markets they are trying to reach. This way, you can create unique campaigns based on customer location and demographics and watch your sales rates skyrocket.
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As a new business owner, you may feel the urge to micromanage everything that happens at your company. However, the truth is that macro-management is a far more effective way of enabling organic growth for your startup.
To keep your company moving forward, you should train top employees to take over some of your daily responsibilities. While you may be tempted to keep costs down by hiring employees who will work for less, in the long run these staff members could end up costing you more if their efforts aren’t up to par. Find people you can trust to get the job done—even when you’re not around—so you can focus on growing and developing your business in the years to come.
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From minimizing spending, to reinvesting profits back into the business, organic growth strategies help ensure that you will retain control of the company you worked so hard to build. Do your research, and consider all the growth strategies available in order to give your business the best shot at success.
Do you know how sales taxes are impacting your bottom line? Check out our sales tax calculator.
This article originally appeared in the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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Featured Image Credit: DepositPhotos.com.
