Running a small business comes with a lot of responsibilities, and understanding payroll tax rates is one of the most important ones. Getting a handle on these taxes can save you time, money, and a lot of stress. Let’s dive into the world of payroll taxes and break down the main types you need to know about to keep your business on track.
Social Security Tax
Social Security tax is a key part of payroll taxes. It funds the Social Security program, which provides benefits for retirees, disabled workers, and survivors of deceased workers.
Rate
The Social Security tax rate for small businesses is set at 6.2% for both employers and employees. This means you, as the employer, and your employees each chip in 6.2% of their wages. If you’re self-employed, you have to cover both parts, totaling 12.4%. Knowing this rate helps you plan your payroll budget and ensures you’re withholding the right amount from your employees’ paychecks.
Taxable Wage Base
For 2024, Social Security tax is only applied to the first $168,600 of an employee’s earnings. Once an employee’s earnings hit this threshold, you stop withholding Social Security tax for the rest of the year. Keeping track of this helps you avoid overpaying or underpaying taxes.
Medicare Tax
Medicare tax is another crucial component of payroll taxes. It funds healthcare services for individuals aged 65 and older, as well as for certain younger people with disabilities.
Rate
Both employers and employees contribute 1.45% of wages for Medicare tax, making a combined total of 2.9%. Unlike Social Security, there’s no wage base limit for Medicare tax—it applies to all earned income.
Additional Medicare Tax
High earners need to be aware of the Additional Medicare Tax. If an employee’s income exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married individuals filing separately, an extra 0.9% tax is added. Unlike regular Medicare tax, this additional amount is only paid by the employee.
Federal Unemployment Tax Act (FUTA)
FUTA is a tax that provides unemployment compensation payments to workers who have lost their jobs.
Rate
The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. This rate is paid solely by the employer and helps fund the federal unemployment program.
Credit
If you make timely state unemployment tax payments, you can receive a credit of up to 5.4%, which reduces the effective FUTA rate to 0.6%. This credit is a great incentive to stay current with your state unemployment taxes and can save your business money. States that carry a loan with the federal government may also be subject to a credit reduction (even if you paid your state unemployment tax in full and on time!) The states with FUTA credit reductions are released each year in November.
State Unemployment Tax (SUTA)
In addition to FUTA, small businesses must also pay state unemployment taxes. Each state sets its own SUTA rates and wage bases, which can vary widely. These funds are used to provide unemployment benefits to workers in your state.
Paid Family and Medical Leave (PFML)
Paid Family and Medical Leave programs are becoming more common and are mandated in several states. These programs allow employees to take paid time off for family or medical reasons, such as the birth of a child or a serious health condition.
Rate and Requirements:
The rates and requirements for PFML vary by state. For example, in some states, both employers and employees contribute to the PFML fund, while in others, only employees contribute. It’s important to check your state’s specific regulations to understand your obligations.
Local Taxes
Some localities impose additional payroll taxes on top of federal and state requirements. These can include city or county taxes that support local services and infrastructure.
Examples:
- San Francisco Payroll Expense Tax: Employers in San Francisco must pay a tax on the total payroll expense for employees working in the city.
- New York City Commuter Tax: Employers in New York City may be required to withhold and pay taxes related to employee commuting benefits.
Tax Credits and Deductions
Knowing about tax credits and deductions can make a big difference in your tax burden.
Employer-Equivalent Deduction
If you’re self-employed, you can deduct the employer-equivalent portion of your self-employment tax from your adjusted gross income. This deduction effectively lowers your taxable income and can reduce the amount of income tax you owe.
Self-Employment Tax
For those of you who are self-employed, it’s important to understand self-employment tax. This tax covers both the employer and employee portions of Social Security and Medicare taxes, totaling 15.3%. This includes 12.4% for Social Security and 2.9% for Medicare. If your earnings exceed certain thresholds, you may also need to pay the additional Medicare tax.
Conclusion
Navigating payroll tax rates for your small business might seem like a daunting task, but it’s essential for budgeting and compliance. By understanding the rates for Social Security, Medicare, FUTA, SUTA, PFML, and local taxes, you can plan your payroll effectively and ensure you’re meeting all your tax obligations. Don’t forget to take advantage of available tax credits and deductions to reduce your overall tax burden. Staying informed and proactive in managing your payroll taxes will help you avoid potential issues and keep your business running smoothly.
So, roll up your sleeves, get familiar with these taxes, and you’ll be well on your way to managing your small business’s finances like a pro!
