When you’re running a business, employer payroll taxes can be one of the most frustrating parts of your job. They might seem like just a small part of your overall tax bill—but they can take up a big chunk of your profits, and they’re not something you can ignore.
Luckily, we’re here to help. This guide will walk you through what employer payroll taxes are. We’ll also show you how to calculate payroll taxes for yourself so that when tax season comes around, you don’t have to worry about getting caught off guard by any surprises!
What Are the Payroll Taxes?
Payroll taxes are payments that employers make to the government. They consist of the federal insurance contributions act tax (FICA) and Self-Employment Contributions Act (SECA) taxes.
Federal Insurance Contribution Act Tax (FICA)
FICA is categorized into two parts: Social Security fund and Medicare fund.
Social security fund: Social Security fund is a portion of an employee’s wages that is used to provide benefits to retired workers and their families. This fund is funded by both employers and employees.
Medicare fund: Medicare taxes are a health insurance program that provides medical services to eligible Americans who are over the age of 65 or people with disabilities. This program pays for medical expenses such as hospital care, doctor visits, and prescription drugs.
The total amount of each person’s contributions depends on both how much they earn and the amount of their employer-provided insurance plan. The more you earn and the more comprehensive your plan is, the more you contribute through FICA taxes.
Self-Employment Contribution Act tax (SECA)
If you’re self-employed, have a corporation, or have a sole proprietorship, you may be subject to Self-Employment Contributions Act (SECA) taxes.
These taxes are calculated based on your net earnings from self-employment, which includes all of your business income minus any deductions for expenses. You report this amount on Schedule SE and pay both the employee and employer shares of Social Security and Medicare taxes.
Other Federal Payroll Taxes
Other employment taxes paid include:
Federal income taxES- employee only:
Employees are responsible for paying their federal income tax, which is calculated based on their salary.
State income tax and local income tax – employee only:
Employees are also responsible for paying state and local taxes on their salaries. These are usually calculated as a percentage of the employee’s annual salary.
Federal Unemployment (FUTA) Tax-employer Only:
Employers are responsible for paying FUTA taxes on each employee’s salary. The amount depends on the total number of employees and how much they earn annually. This tax is paid to the federal government, not to individual states or local governments.
State Unemployment (SUTA) Tax
Paid by the employer but some states require contribution by both employer and employee. SUTA taxes are used to provide benefits for temporary workers who lose their jobs through no fault of their own.
Payroll Tax Rates
Payroll taxes are a percentage of an employee’s income that goes to the government. The employer and employee each contribute to the same amount, but the difference is that the self-employed individual has to pay both the employer and employee portions of FICA taxes.
Social Security Taxes Rate
Social Security taxes have a flat rate of 12.4% for the first $147,000 of an employee in 2022. This means that your employer will withhold 6.2% (12.4% / 2) from your salary and contribute 6.2% as the employer.
The rates change annually, so make sure you check with your accountant to see what year’s rate applies to you.
Medicare Tax Rates
The Medicare tax rate is a flat rate of 2.9%. This means that, no matter how much your salary is, you will pay the same amount of Medicare tax.
To calculate your Medicare tax, divide the total percentage between you and your employees. (2.9% / 2).).
Meaning the employer will Withhold 1.45% of your salary which is half the rate and contribute 1.45% as the employer.
However, there is an additional Medicare tax of 0.9% once employees earn above a certain amount. The amounts are $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for single filers. If an employee earns above that amount, they will pay (1.45% + 0.9%) 2.35% in additional Medicare taxes, and their employers will pay 1.45%.
Self-employment Tax Rate
The self-employment tax rate is the same as both SECA and FICA rates, but it is only paid by one individual.
This means that the flat rate of 12.4% for social security tax and 2.9% for medicare tax give a total of 15.3% of self-employment tax (SECA).
Note that only the first $147,000 applies to the social security tax. The self-employment tax rate will go up to 3.8% (2.9% + 0.9%) when the additional Medicare tax kicks in.
TPI Group Inc is located in Vienna (VA) and has been offering Payroll Accounting Services, Tax Consulting Services, and Tax Preparation Services since 1994. We have a team of accountants, CFPs, tax attorneys, and IRS-enrolled agents that have been competently serving clients with integrity, diligence, and professionalism. Our mission is to provide high-quality service to our clients professionally at an affordable price.
If you are looking for a company that will help you with your taxes or payroll needs please contact us today.