Each time you pay your team, there are several tax terms glaring back at you. Small business owners often wonder what exactly they are and why you have to pay them all. At Goldin Group, we’re here to clear up any confusion. This article will break down the different payroll taxes, so you can have a better understanding of exactly where your payroll dollars go.
The following are taxes you and your team pay:
Social Security: Social Security is a federal program of social insurance and benefits developed in 1935. The Social Security program’s benefits include retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits. Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars per year. Today, two out of three senior citizens rely on Social Security for supplemental income. To make the program work, you and your team contribute to it every paycheck, which comes out to 6.2% of your employees’ gross (total) income.
Medicare: Medicare was created in 1966 to provide health insurance for people 65 and older, along with those who have certain disabilities. Currently, around 54 million Americans benefit from health insurance under the program. Sustaining Medicare means that both you and your employee are required to pay 1.45% of their total income to the program, while people who make over $200,000 need to contribute an additional 0.9%.
These are taxes only you have to pay:
Federal unemployment taxes (FUTA): The Federal Unemployment Tax Act, or FUTA for short, provides a buffer for people who have recently lost their jobs. While it’s true that employers have to pay 6% toward FUTA, companies who pay their state unemployment taxes on time receive a 5.4% credit reduction. After all is said and done, the FUTA tax rate equals 0.6% of all taxable wages — which equates to up to the first $7,000 earned for each employee. You can expect it to be in the ballpark of $42 per worker, per year.
State unemployment insurance (SUI) is another safety net for people who are looking for a new job. Nearly every state has a different tax rate, which is usually determined by the type of business you have and your history with unemployment claims. Visit the US Department of Labor’s state law website at https://www.dol.gov/whd/state/state.htm to learn more about your particular rate.
The following are taxes only your employees have to pay:
Federal income tax: This tax is paid by employees only and is calculated off of their total income, filing status, and personal exemptions. Excluding any deductions, the minimum federal tax rate is 10%, and the maximum federal tax rate is 39.6% for any income over $415,050 (for single filers) or $466,950 (for married joint filers).
State income tax: Most states collect income tax. This is true unless you work in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, because they are totally tax-free.
Local/county taxes: These often need to be processed along with your federal and state payroll taxes. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site. So if an employee lives in a county that’s different from where they work, companies may choose to lend them a hand by withholding their local residential taxes as well.
We hope this post helps provide some clarification on payroll taxes. If you need help managing any aspect of your nonprofit’s or business’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.