Calculating and withholding taxes from employees’ paychecks is a big part of payroll. The Federal Insurance Contributions Act (FICA) is made up of Social Security and Medicare taxes, and is required by federal law to be calculated, withheld, and reported. Employee wages are also subject to Federal income tax (FIT) and, in most states, State income tax (SIT) also applies. Depending on where employees work, local or city taxes might also apply.
Employers are subject to payroll taxes as well, which include the employer’s share of FICA, and contributions under the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) – which may sometimes be referred to as State Unemployment Insurance (SUI). In some states, employees may be subject to a portion of the SUTA tax.
Currently, FICA is calculated at 15.3% of applicable wages, which is split between employee and employer (6.2% each for Social Security, and 1.45% each for Medicare). For individuals earning in excess of $200,000 in a tax year, an additional 0.9% applies to the employee portion of Medicare. A wage base limit also applies to the Social Security tax, and wages above the limit are not subject to the Social Security portion of FICA. For the 2021 tax year, this limit is $142,800. Employers may refer to IRS Publication 15 for current wage limits.
FIT calculations are based on each individual’s wages and their elections on federal Form W-4. Information on the W-4 may vary based on each person’s unique situation, which means withholding amounts can differ even among employees earning the same wages. Many states have similar forms for employees’ SIT withholdings, though some may allow employers to use the federal form for state withholding as well. If a local tax applies, employers will need to refer to the specific rules for each of the appropriate states and jurisdictions.
FUTA is calculated at a rate of 6% on applicable wages up to $7,000 per employee. Employers may be eligible for a FUTA tax credit of up to 5.4%, effectively reducing their FUTA tax rate to 0.6%, if they are in good standing on their SUTA and if the state is not determined to be a credit reduction state. The IRS provides details on FUTA requirements and credit reduction. SUTA rates and wage limits vary from state to state. Employers should check with each state’s Department of Labor to determine employer registration and liability requirements, wage limits, and assigned tax rates.
Staying up to date and keeping track of ever-changing payroll tax requirements, calculations, and wage limits can seem like a daunting and stressful task. Simple errors or seemingly minor oversights can lead to complex issues which, in turn, could result in time-consuming audits and costly penalties with the various state and federal offices. Working with a payroll expert can greatly reduce the risk of errors and help you stay current with the rules in each state. Contact us today and see how the team at Valor Payroll Solutions can save you the hassle and headache of payroll tax compliance, so you can focus on your business.