Every time your small business pays an employee, you're responsible for both issuing an accurate paycheck and withholding, paying and reporting an assortment of taxes. Fully understanding your obligations can help you better manage cash flow, maintain compliance and avoid costly surprises. Let's review the fundamentals.
Employers must withhold federal income tax from employees' paychecks. The amount of income tax withheld from each employee's pay depends on two factors: 1) the amount of the wages, and 2) information provided on the employee's Form W-4, "Employee's Withholding Certificate." Additional withholding rules may apply to commissions and other forms of compensation.
Be sure to stay apprised of your non-federal payroll tax obligations, too. State income tax withholding rules, for example, apply to many employers. However, nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — don't impose an individual income tax on wages. Certain localities also impose income taxes. And in some places, withholding is required to cover short-term disability, paid family leave or unemployment benefits.
Payroll taxes authorized under the Federal Insurance Contributions Act (FICA) comprise two components:
Both employers and employees must pay FICA tax; employers must withhold the employees' share. Once an employee's wages from your business reach the Social Security wage base, you can generally stop withholding and paying Social Security tax for that employee for the remainder of the year. The wage base resets at the beginning of the next calendar year.
Employees may owe a 0.9% additional Medicare tax when their applicable wages (and certain other forms of income) exceed the following thresholds:
The Affordable Care Act established these thresholds, and they aren't adjusted annually.
Note that the additional Medicare tax is paid by employees only; employers don't match it. However, an employer must begin withholding it in the pay period when an employee's wages exceed $200,000 in a calendar year, regardless of the individual's filing status.
The Federal Unemployment Tax Act (FUTA) imposes an employer-paid tax that generally applies to the first $7,000 of each employee's annual wages. Its purpose is to help states pay eligible workers who are involuntarily terminated from their jobs. The basic FUTA rate is 6%, but employers may be eligible for a credit for state unemployment tax of up to 5.4%, resulting in an effective rate of 0.6%. However, the credit is reduced if a state has outstanding federal unemployment loans.
And don't overlook your potential obligation under a State Unemployment Tax Act (SUTA). Every state also runs its own unemployment insurance program to provide benefits to eligible workers who are involuntarily terminated.
An employer's SUTA rate may be based partly on its claims experience, though formulas vary by state and special rates generally apply to new businesses. States typically notify employers of their applicable rates annually, so be sure to keep an eye out for these updates and review them carefully.
When you think about your small business's tax burden, your mind might automatically leap to income taxes. But if you have employees, payroll taxes should also be on your radar.
Your business must properly calculate, pay, deposit and report applicable payroll taxes — including amounts withheld from employees' wages and employer-paid taxes. Errors may lead to penalties, interest and unexpected cash flow problems. We can help you identify your obligations and refine your payroll practices to stay in compliance.
Get in touch today and find out how we can help you meet your objectives.
