Being a small business owner comes with many responsibilities, including but not limited to collecting sales tax, hiring new employees, and setting up a marketing system that works. As a business owner, it’s important to know about payroll taxes and whether or not you owe any. Failing to pay could lead to severe consequences.
Defining payroll taxes
While both payroll taxes and income taxes are based on an employee’s wages, payroll taxes and income taxes are two completely different things. Unlike income taxes, payroll taxes are paid mostly by the employer. Federal payroll taxes account for Social Security, Medicare, and unemployment insurance.
State unemployment insurance falls underneath the State Unemployment Tax Act (SUTA). Like the name suggests, this tax gives state unemployment benefits to eligible workers who lose their job through no fault of their own. It should be noted that the state unemployment insurance tax rate varies by state. California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico require employers to provide short-term disability insurance for non-work related injuries and illnesses that prevent an employee from doing their job. If your business operates in one of these states, you may be required to withhold taxes from your worker’s pay or pay the taxes to cover the insurance costs.
Social Security and Medicare are the two main federal payroll taxes. Both are mandated by the Federal Insurance Contributions Act (FICA). Social Security taxes, also known as OASDI (Old Age, Survivor and Disability Insurance) taxes, fund Social Security benefits. As an employer, you’re required to pay 6.2 percent or half of the 12.4 percent Social Security tax owed on the first $118,500 of an employee’s wages. This year, the max wage cap is expected to rise up to $127,200, a 7.3 percent jump from 2016. Employers are also required to split Medicare tax owed on an employee’s wages, which is roughly 1.45 percent. The Medicare tax, includes taxes such as the Medicare Hospital Insurance (HI) tax, which funds the hospital insurance component of Medicare benefits.
Another, but smaller, federal payroll tax is under the Federal Unemployment Tax Act (FUTA). This tax, similar to the SUTA, helps pay for the federal-state unemployment insurance system. Only the first $7,000 of an employee’s wages are used to calculate this tax. Employers can pay up to $42 per year for FUTA.READ MORE: Mayor Lightfoot Delays General Iron Permit To Move To South Side Over EPA Concerns
Acronyms to know
FICA — The Federal Insurance Contributions Act
FTD — Federal tax deposit
FUTA — Federal Unemployment Tax Act
OASDI — Old Age, Survivor and Disability Insurance
SUTA — State Unemployment Tax Act
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This article was written by Tabitha Shiflett for CBS Small Business Pulse