Here’s a quick bookkeeping question for you, which of the following is NOT an employer payroll cost?
(a) Employer contributions to a retirement plan
(b) Federal Insurance Contributions Act (FICA) taxes
(c) Federal Unemployment Tax Act (FUTA) taxes
(d) Federal and state income tax
The answer is (d), Federal and state income taxes.
Income taxes are only paid by the employee, although it is you—the employer—who deducts them from your employee's wages. Confusing, huh? Income tax withholding is determined by gross wages and the information the employee provided to you at the start of their employment on their Form W-4 or if you are in California (just to make things a bit more confusing), a DE 4 form is now needed for the 2020 tax year.
Now all that aside, did you get the question right? If not, and you’re still scratching your head, you are not alone.
So What Are Payroll Costs?
At this point, you may be asking yourself what exactly are payroll costs? Put simply, payroll costs is a blanket term that describes what an employee costs a business each pay period.
Payroll costs include employee wages and payroll taxes.
Also, depending on the employment package you offer, and the type of company you own, there may be other variables that go into your payroll costs, like workers’ compensation insurance, 401k contributions, health insurance and any other benefits you pay into.
But How Do I Know Which Taxes Are Payroll Costs?
A good question! And a classic quandary for a small business—which taxes do you pay on behalf of each employee, and which taxes are withheld (and called withholdings) from the employee’s wages, and passed onto the state and federal government?
Putting aside the payroll costs that are employee wages, insurance premiums, and all employer-matched contributions, like retirement plans, let’s focus on your tax contributions that are payroll costs:
- Federal Unemployment Tax Act (FUTA) taxes
- Federal Insurance Contributions Act (FICA) taxes
- And sometimes, depending on your state, State Unemployment Tax Act (SUTA) taxes
Covers Social Security and Medicare. You withhold from your employee’s paycheck 6.2% for Social Security and 1.45% for Medicare. In total, this is 7.65% of their paycheck. You then match and remit the same amount to pass on quarterly as a FICA tax.
Is an employer payroll tax. Only the employer pays FUTA tax; you do not collect or deduct FUTA tax from your employees' wages. The total amount deducted can be 6.0% and applies to the first $7,000 of an employee's wages. However, most states have a 5.4% tax credit, meaning most employers only pay 0.6%. For more information, refer to the instructions for Form 940.
SUTA tax is slightly more complicated. Not only is it sometimes called Unemployment Insurance—or if you’re in Florida, Reemployment Tax—the rate of SUTA is decided at the state level. Some states require that both employer and employee contribute. At the moment, this is limited to Alaska, New Jersey, and Pennsylvania. Everywhere else, only the employer pays. If you have employees in those states that require employees to contribute as well, you will need to withhold SUTA tax from their wages and then remit it to the state. Thankfully there are currently only two simple factors that determine your SUTA calculation: your business' taxable wage-base and your current tax rate.
Interestingly, if your business has low employee turnover, this can help to keep your state unemployment tax rate from increasing. So it literally pays to be a good boss.
When And Where Do I Send The Withholdings?
The withholdings you have kept from your employee wages for federal income tax and FICA tax are paid semi-weekly or monthly depending on your tax status under IRS rules. State income tax withheld is paid under the state rules. You file your Form W-2 with the Social Security Administration annually by January 31. The W-2 reports the amount of federal, state and other taxes withheld from your paycheck.
As a responsible employer, you have to get this absolutely right, not just to make sure that your employees are reimbursed fairly, but also to save yourself any future headaches. Any mistake made with payroll costs could leave your business with a big financial burden. If you withhold the wrong amount of tax, it is you—the employer—who is liable.
Internal Revenue Service Filing Information
The Federation of Tax Administrators has published a list of each state’s taxing authority in case you have questions about your state's tax rules. You can refer to the IRS if you need to find out information about your federal taxes. The IRS provides the filing forms with instructional guides on their website.
- FICA taxes are reported quarterly using Form 941 (PDF).
- FUTA taxes are reported annually, at the end of the calendar year using Form 940.
- And don’t forget if in California you’ll pay SUTA to Employment Development Department (EDD), which you can register with online using EDD’s e-Services for Businesses. Information about SUTA can be found online in each state's Department of Labor.
How Can I Make Sure My Payroll Is Correct?
No one starts a small business because they want to be a part-time accountant. With ever-fluctuating tax rates and changes in local and federal tax laws, payroll deductions can be both complicated and yawn-inducing (not a great combination for accuracy). Luckily there are now many software programs that can help.
Hourly has a full suite of payroll tools for growing businesses. From time tracking to mobile payroll options—they can help you spend seconds, not hours, processing your payroll each week.
What's more, Hourly syncs your payroll data directly to your workers’ comp policy so you only pay exactly what you owe on your premiums, not an estimate. Its goal is lower audit risk, faster payroll runs, and better claims and safety services for small businesses everywhere. Hourly is a licensed insurance agent with products underwritten by various insurance companies