Only two things are certain in this world: death and taxes. Today we’re discussing the latter.
If you work or own a business in the United States, payroll taxes are just one of the many taxes you’ll encounter in your world.
According to the Center on Budget and Policy Priorities, payroll taxes are the second-largest source of federal tax revenue for the United States. In 2019, income taxes made up 50% of the federal government’s revenue, and payroll taxes made up 36%.
But what counts as a payroll tax? How do you pay them? And who’s responsible for paying them? We’re answering those questions and more in this guide on how to pay payroll taxes.
From Social Security To Medicare Taxes
Payroll taxes are federal and state taxes on wages that support Social Security, Medicare, unemployment, and other programs.
Some people also consider federal, local, and state income taxes to be payroll taxes because they’re also withheld from a paycheck and paid to the government. However, while income taxes are paid at different rates depending on gross pay, the payroll tax rate is the same for everyone.
So what are the payroll tax rates for 2020? And what do employers and employees have to pay?
Federal Payroll Taxes
- FICA (Federal Insurance Contributions) Act: The FICA Act levies taxes to fund Social Security and Medicare.
- Social Security: A 12.4% tax on earnings helps fund Social Security. If you’re an employer, you’re responsible for paying half of this tax burden (6.2%), and your employee is responsible for paying the remaining 6.2%. If you’re self-employed, you’re responsible for paying the full 12.4% to the IRS.
- Medicare: A 2.9% tax on earnings helps fund Medicare. Note an additional Medicare tax of .9% on wages over $200,000. If you’re an employer, you’re responsible for paying half of the Medicare tax burden (1.45%), and your employee is responsible for paying the remaining 1.45%. If you’re self-employed, you’re responsible for paying the full 2.9% Medicare tax to the IRS.
- FUTA (Federal Unemployment Tax Act): The FUTA tax is a 6% tax on the first $7,000 of wages an employee earns that funds federal unemployment. State unemployment insurance taxes provide a 5.4% credit against FUTA, so the rate is usually 0.6%. Unlike FICA, the employee is not responsible for paying FUTA. Only employers, including the self-employed, pay this tax. This tax is capped at $420 annually per employee.
State Payroll Taxes
Payroll tax rates and type vary significantly across the country. These are the types of state payroll taxes you can encounter around the United States:
- SUTA (State Unemployment Tax Act): This payroll tax is known as SUI (State Unemployment Insurance) in some states and Reemployment Tax in others. It’s the state-level equivalent to FUTA and pays into state unemployment programs. SUTA rates vary significantly from state to state and range from less than 1% in South Carolina, to almost 15% in Massachusetts.
- FMLA (Family and Medical Leave Act Insurance Tax): Washington, D.C. and eight states (California, Connecticut, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Washington) have paid family leave laws. If you’re an employer in one of these locations, check with your state’s tax collection agency to determine how much you or your employees must pay into the paid family leave insurance tax.
- SDI (State Disability Insurance Tax): Employers and employees pay State Disability Insurance Tax in five states: California, Hawaii, New Jersey, New York, and Rhode Island. Additionally, at least two states (New Jersey and Rhode Island) use temporary disability insurance (TDI). This payroll tax helps fund disability payments for non-work-related injuries or disabilities. In California, the SDI tax rate is 1%.
- State Workers’ Compensation Insurance Tax: Workers’ compensation covers payment to employees who become injured or sick at their job due to the work performed. Workers’ comp requirements and rates vary significantly from state to state, so look up your state’s laws for specific information.
California State Payroll Taxes
Employers and employees in California are responsible for paying four taxes levied by the state. They include:
- ETT (Employment Training Tax): Employers in California are responsible for paying the ETT, which funds training for employees in specific industries to help businesses in the state thrive. This tax is equivalent to 0.1% of the first $7,000 of employees’ wages, for a maximum of $7 per employee per calendar year.
- UI (Unemployment Insurance): Employers are also responsible for paying California’s version of SUTA on behalf of their employees. New employers that have existed for up to three years pay a 3.4% UI tax on the first $7,000 of their employees’ wages. This tax rate varies after the third year but doesn’t exceed 6.2%, or $434 per employee per calendar year.
- PIT (Personal Income Tax): Employees in California pay the PIT to fund public services like healthcare and schools. Employers are responsible for withholding the PIT from employees’ wages. PIT rates vary and can be calculated using the State of California Franchise Tax Board’s tax calculator.
- SDI (State Disability Insurance): Employees are responsible for contributing 1% of the first $122,909 of their income to California’s disability insurance program, for a maximum of $1,229.09 per year. California employers are responsible for withholding this payroll tax from employees’ paychecks.
Where To Pay Payroll Taxes
Paying payroll taxes would be simple if they all went to the same place. Instead, you have to pay your taxes through different institutions for each level of government that levies taxes.
- Federal payroll taxes: These taxes on the national level, like FICA and FUTA, are paid to the IRS. You can make payments to the IRS via the EFTPS (Electronic Federal Tax Payment System), an online tax filing system.
- State payroll taxes: Taxes like SUTA, FMLA, and SDI are paid through your state’s tax agency. Most states have an electronic filing system. California’s system supports many payment options including bank transfers, electronic funds transfer, and credit card payments.
If you’re also subject to local taxes for payroll, they are generally paid through your city or town’s municipal tax office.
How To Pay Payroll Taxes
Whether you’re the CEO of a Fortune 500 company and have thousands of employees, a small business owner with several staff members, or are self-employed, you have several options when it comes to processing payroll taxes:
- Hire a tax professional to calculate payroll tax withholding and do tax filing
- Outsource to a payroll service
- Use payroll software to automate tax payments.
- Calculate and file manually
We’ll break down our recommendations for how to pay these important taxes, with guidance for whether you’re an employer or a self-employed independent contractor.
How To Pay As An Employer
If you’re an employer with numerous employees, you might consider hiring a team dedicated to payroll. Be sure to hire licensed tax professionals who know your state’s tax code and can help you stay on top of compliance.
If you’re a small business owner with several employees, you should outsource payroll tax filing to a payroll service, or use a payroll software like Hourly that will file your taxes for you. These affordable options can automate paying payroll taxes so that you can focus on running your business.
How To Pay Self-Employment Taxes
If you’re self-employed, you’re responsible for withholding, filing, and paying your payroll taxes.
Unlike Form W-2 employees, whose income taxes and payroll taxes are withheld from their paychecks and filed by their employers, Form 1099 independent contractors aren’t subject to tax withholding. They are responsible for paying income taxes and payroll taxes to the government on their own.
Also, unlike W-2 employees, whose employers subsidize half of their FICA payroll taxes, sole proprietors are responsible for paying the full FICA (24.8%) and Medicare (5.8%) tax rates respectively. Sole proprietors don’t pay FUTA, since they don’t have employees.
Sole proprietors file payroll taxes by filling out Schedule C as part of IRS Form 1040. They must also pay estimated self-employment taxes quarterly through the IRS and their state tax agency to avoid a penalty for underpayment.
When To Pay
So when do you pay these taxes? The answer to that depends on whether you’re an employer or self-employed.
When To Pay Federal Payroll Taxes As An Employer
Tax code determines which employers pay FICA and Medicare taxes monthly, semi-weekly, or the next day.
Employers who follow the monthly deposit schedule must make payments by the 15th of the next month.
Employers who follow the semi-weekly deposit schedule and pay their employees between Wednesday and Friday must file payroll taxes by the following Wednesday. Those who pay their employees between Saturday and Tuesday have until the next Friday to file taxes with the IRS.
FUTA tax payments are made quarterly to the IRS and are due before the end of the first month, after the end of the quarter.
When To Pay State Payroll Taxes As An Employer
States set their own payment schedules for collecting payroll taxes. Check your state’s tax agency to find tax due dates.
For example, in California, employers have a combination of semi-weekly, monthly, and quarterly deadlines for individual payroll taxes.
When To Pay Federal Self-Employment Taxes
Sole proprietors are required to file estimated SE (self-employment) taxes with the IRS every quarter. These payments are due on the 15th day of the month that follows the end of the quarter. They include both payroll taxes and income taxes.
When To Pay State Self-Employment Taxes
Many states follow a filing schedule for quarterly taxes that is similar to the IRS’s. That includes California.
Final Thoughts: How To Pay Payroll Taxes
Whether you run a small business with several employees or you’re self-employed, it’s your duty as an American to pay payroll taxes. They make up more than one-third of federal tax revenue and fund critical social programs like Social Security and Medicare.
While all working Americans have to pay payroll taxes, it can be a complicated process. Paying them manually—from calculating how much you owe to making the deposits on time—is tricky. That’s why many entrepreneurs take paying payroll taxes off of their plates by using a payroll processing software that automates the process.