With the global economy struggling, the US government has announced a payroll tax cut through the end of the year. This means that employees will see their paychecks go up by nearly 8%.
It is important to understand that the federal government is simply deferring the tax collection. They will collect these payroll taxes during the refund season.
We have all received a paycheck that did not meet our expectations. This is because of the many payroll deductions that reduce your gross pay.
To help clear up the confusion, read on for a business owner’s guide to understanding payroll taxes.
What Are Payroll Taxes?
Before we dive into the specifics, it is important to understand exactly what these taxes are for. Payroll tax deductions are used to fund state and federal government programs.
On the federal level, the US government passed the Federal Insurance Contributions Act (FICA). You will commonly hear the term FICA taxes as well.
FICA established entitlement programs like Social Security and Medicare. These programs are funded by payroll deductions.
Both employers and employees alike contribute an equal amount for FICA taxes. The employee’s share is deducted directly from his or her paycheck.
Employers also help fund the federal unemployment program. This is referred to as the Federal Unemployment Tax (FUTA).
In addition to federal taxes, there are also taxes assessed by state and local governments. They cover programs like unemployment insurance (UI).
How Much Is Deducted?
Now that we know what FICA taxes are, it is time to learn how much is deducted. Most companies utilize a quick paycheck stub generator or a similar payroll program. Each employee can review their paystub to see exactly how much is deducted.
For Social Security, each party contributes 6.2% to the entitlement program. The federal government only collects Social Security taxes on the first $137,700 of wages.
On Medicare, both employees and employers pay 1.45%. However, Medicare does not have a cap. Instead, the employee pays an additional 0.9% for wages over $200,000.
Employers also are responsible for paying FUTA. This is a 6% tax assessed on the sum of your employees’ wages.
Lastly, there are various state and local tax deductions. Unfortunately, we cannot define a specific number or percentage because it varies by state, county, and city. Check to see what’s required by law in your locale.
How Do Employers Pay Taxes?
While employees’ contributions are deducted from a paycheck, the employer’s contribution is different. It gets sent directly to the US Treasury Department.
Employers can make tax payments via the Electronic Federal Tax Payment System (EFTPS). The Internal Revenue Service (IRS) will provide a schedule when these payments are due.
Payroll experts, however, recommend that you make payments concurrently with your employee payment schedule.
A Recap of Payroll Deductions for Business Owners
It is critical that you understand the various taxes and deductions on your employees’ paychecks. By failing to do so, your company could be fined by the IRS or owe substantial amounts of back taxes.
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