Payroll 101: The 6 Payroll Taxes Employers Need to Cover
In this article, ADP payroll expert Stephanie Monaco, CPP, helps us come up with a list of employer-paid taxes and tips on how you can keep track of your payments.
When you hire employees, you need to pay several taxes on their behalf. Keeping track of all the employer-paid taxes for payroll isn't easy, and you might not realize you've missed one until you get hit with a government penalty.
For the next entry into our National Payroll Week series, ADP payroll expert Stephanie Monaco, CPP, helped us come up with a list of employer-paid taxes and tips on how you can keep track of your payments.
1. Social Security
Social Security taxes are split between employers and employees, with each party owing 6.2 percent of an employee's wages. Deduct what your employees owe from their paychecks as part of payroll.
There are income limits associated with Social Security taxes. Once an employee earns $127,000 in wages, no more Social Security taxes are required for the rest of the year, assuming tax payments have been made properly.
Medicare taxes are also split between employees and employers. You both owe 1.45 percent on every dollar an employee earns. There is no income limit for Medicare tax, so it applies to all of an employee's wages.
An additional 0.9 percent Medicare tax applies to high earners, paid only by employees. It kicks in once an employee has earned $200,000 in wages for the year. So for any wages above $200,000, the employee owes an extra 0.9 percent for Medicare. You do not pay anything for this extra tax but must withhold it from employee's wages.
3. State Unemployment
Every state requires you to pay unemployment taxes for each employee to support the state's unemployment fund. Your rate depends on your state and the turnover at your business. You can look up each state's rates here.
Alaska, New Jersey and Pennsylvania also have an employee-paid portion for state unemployment. Collect this from employees' paychecks as part of payroll.
4. Federal Unemployment
You also need to pay federal unemployment tax for each employee. The official rate is 6 percent of an employee's wages, up to $7,000 a year. To partially offset this amount, however, you get a credit for whatever you've already paid for state unemployment.
5. State Disability Insurance
Five states require you to purchase disability insurance for your employees. In California, New Jersey and Rhode Island, you pay the state government directly to buy insurance. In New York and Hawaii, you buy the insurance from a private insurance company.
6. Local Taxes
You may also owe local taxes for your employees. Check with your local tax department to see whether they collect any additional employer-paid taxes.
It's up to your business to calculate employer-paid taxes and send the appropriate amounts to federal, state and local governments. When you send in a payment, keep an eye on your bank account to make sure it's been received. If your check is lost in the mail, the government will count your taxes as unpaid.
If you miscalculate and don't pay the right amount, the government will notify you that they calculated differently and tell you the amount they believe you still owe. In this case, you would owe interest and a penalty for the late payment.
If you're worried about managing employer-paid taxes, outsourcing payroll to a full-service organization is a smart option. This can help ensure that your payroll and taxes are calculated and completed correctly while you free up time and energy to focus on your business.
See Part 3 of Payroll 101: What to Know About Payroll Record Keeping for Your Small Business
You should consult experienced counsel to understand any applicable federal, state, local and industry specific retention rules.