Managing your payroll taxes is a critical part of growing a business. Each of us has a limit to our capabilities and eventually, bringing in outside help is the most effective way to continue to expand. While making new hires is an exciting time for a small business, it also comes with a large number of new challenges. One of those challenges is managing payroll taxes.
What Are Payroll Taxes?
Payroll taxes are taxes that a company must pay on behalf of their employees. These taxes fall in two categories:
- Deductions from employee wages
- Taxes paid by the employer based on the employee’s wages
For the first category, the company withholds these amounts from the employee’s salary and sets them aside to be paid later. In these cases, the employee is directly shouldering the burden of these taxes. The second category includes taxes that the company pays on behalf of the employee and are therefore an additional cost for the company.
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Common payroll taxes include:
- Social Security
- State Unemployment
- Federal Unemployment
Some businesses will be subject to additional taxes. For example, here in Denver (where PaySimple is headquartered) we have a “head tax” which charges employees and employers a nominal fee for every employee earning over $500 per month.
Which Taxes Are Paid by the Employer?
Employers pay a portion of Social Security and Medicare, while the other portion is taken from the employee’s wages. On the other hand, for unemployment taxes, the employer pays the entire portion for federal (and most states).
Social Security has a total tax percent of 12.4%, which is shared equally by the employee and the employer (the employer pays 6.2% and another 6.2% is withheld from the employee’s salary). The one caveat here is that as of 2022, Social Security has a wage cap of $147,000. So, if an employee earns more than this, the total tax for them is only 12.4% of $147,000.
Similarly, Medicare has a total tax percent of 2.9%, which is also shared equally by the employee and the employer: 1.45% is withheld from the salary and 1.45% is paid from the employer. Medicare has no cap.
State Unemployment is generally paid by the employer, but double check with your particular state for due diligence. The amount that is owed by the employer is variable as well, changing from state to state.
Federal Unemployment has a tax rate of 6.0%, all of which is paid by the employer. The cap is a low $7,000, so the total amount is usually $420 per employee (6% x a max wage of $7,000). Most employers receive a credit of 5.4% on this 6% for allowable state unemployment tax, which reduces this effective rate to 0.60% on $7,000, or $42 per employee.
What is a Pretax Deduction?
Pretax deductions are where things start to get a little more complicated. In plain English, these are amounts that are subtracted from an employee’s income before calculating taxes. This can make a significant difference since it is effectively lowering that employee’s taxable income.
In the most common example, if an employee paid into a 401(k) plan, this amount would be deducted from their taxable income prior to applying any income taxes. While this particular example doesn’t impact Payroll Taxes, other instances of pretax deductions will.
One such example of this would be an employee who pays into a Flex Spending Account, which is a way an employee can pay for health insurance premiums on a pre-tax basis. In this example, the employee would only be subject to tax on their income after the deduction. So, if they made $4,000 per month and paid $200 into this plan, their taxable income (for Social Security and Medicare) would only be $3,800.
What is Unemployment Tax?
This special tax is paid by the employer as a way to allow the government to help support those workers who leave a position involuntarily. As each state has its own Unemployment Tax, it changes from state to state. However, there is also a Federal Unemployment tax that helps fund the state workforce agencies. These taxes work together, in a sense, to help provide laid-off workers with the funds they need in order to get by, while they search out their next employment opportunity.
How Often Do I Need to Deposit my Payroll Taxes?
So, now you’ve collected your Payroll Taxes–but how often are you required to deposit them? Well, this is entirely dependent upon something called a “look-back period.” Essentially, this means that you look to your payroll taxes in the prior twelve-month period ending the preceding June 30. For example, if it is 2022 and you are “looking-back,” you’ll look to the period from June 1, 2020 to June 30, 2021. In this period, if you paid more than $50,000 in payroll taxes, you will be depositing on a semi-monthly schedule. Otherwise, you will deposit on a monthly schedule.
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