Payroll Taxes: A Quick Breakdown

Payroll taxes, a great mystery to 99% of the general population.  Business owners frequently try to come up with an average percent that payroll taxes cost their business, and the truth is that it’s just not that simple.  Some employer taxes are a flat percent on all wages that an employee earns (Medicare) while other tax types (FUTA, SUTA, Social Security) limit the amount of taxable wages each year.  When it comes to payroll taxes, the employer is responsible for calculating each tax type, withholding the proper amounts from employee checks, remitting the tax payments to the proper agencies, and filing the relevant payroll tax returns with each tax agency.  If tax returns and payments are not remitted on time, additional penalty and interest amounts are also assessed.

We’ve tried to keep this outline as simple as possible without leaving out any key details.  Here’s Valor Payroll Solution’s breakdown of payroll taxes:

Employer & Employee Payroll Taxes:

  • Social Security and Medicare taxes, sometimes grouped together or referred to as FICA taxes, are paid by both the employer and the employee.
    • Social Security tax is 12.4% (6.2% paid by the employee and 6.2% paid by the employer) of the first $137,700 in taxable wages (for 2020).
    • Medicare tax is 2.9% (1.45% paid by the employee and 1.45% paid by the employer) on all taxable wages.
      • In addition, the employee is charged an additional .9% Medicare tax on wages paid over $200,000 per year.
    • You can access the full Employer’s Tax Guide published by the IRS here

Employer Payroll Taxes:

  • Federal Unemployment Tax (FUTA) is 6% on the first $7,000 in wages each year.
    • As of 2020, all states received the FUTA tax credit of 5.4%, effectively making the tax .6%
  • State Unemployment Tax (SUTA/SUI) varies by state.  Each state determines the taxable wage base per year and assigns the employer an experience rate.
    • Click here to download the APA’s SUI Taxable Wage Bases 2018-2021 report

Employee Payroll Taxes:

  • Federal income tax (federal withholding)
    • Federal income tax is calculated based on the employee’s Form W-4.
  • State income tax (state withholding)
    • All states, with the exception of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have a state income tax.
    • State income tax is calculated based on federal Form W-4 or the state’s specific withholding form, as applicable.
  • State Disability Insurance (SDI)/Temporary Disability Insurance (TDI) – administered by certain states
    • California
    • Rhode Island
    • New Jersey
    • Hawaii
    • New York
  • Local taxes – administered by certain states (see list below)
    • Alabama
    • Arkansas
    • Colorado
    • Delaware
    • Indiana
    • Iowa
    • Kentucky
    • Maryland
    • Michigan
    • Missouri
    • New Jersey
    • New York
    • Ohio
    • Oregon
    • Pennsylvania
    • West Virginia

If you made it through the end of this article, congratulations!  Once your head stops spinning feel free to reach out to see how Valor Payroll Solutions can help.

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