Employers of all sizes, particularly small business owners, have various payroll tax payment and withholding obligations. Federal payroll tax responsibilities for employers include withholding Social Security and Medicare taxes from an employee’s wages and paying the employer’s contribution. The primary concern is the proper payment of FICA taxes. FICA taxes are unique because withholding is required from employees’ wages, and employers must also pay a portion of the taxes. Even if the business does not offer paid vacation or benefits, there are certain tax obligations and expenses an employer incurs by simply hiring employees.
Understanding Employment Taxes
Each new employee must complete IRS form W-4 upon being hired. This form allows employers to calculate the federal income tax amount to withhold from workers’ wages. Most states structure income tax structures based on the federal system, so the W-4 will also provide the state income tax figure to withhold. Besides salaries and wages, employers incur some or all of these payroll-related expenses:
“Federal income tax: Businesses must withhold federal income tax from employees’ earnings and deposit the withholdings. The conditions for depositing fluctuate depending on the industry and the amount withheld.
“State income tax: State income taxes differ by state; some are percentage-based, flat rate, or not taxed at all. Most are a percentage of wages based on income that is paid to the state government.
“Social Security and Medicare taxes: Employers must withhold a portion of employees’ salaries for social security and Medicare taxes and then match the amount when depositing the funds withheld.
“Additional Medicare Tax: Businesses must withhold 0.9 percent Additional Medicare Tax on employees’ earnings when the amount exceeds a predetermined threshold based on the employees’ filing status.
“Workers’ compensation insurance: This insurance covers expenses for employees who are injured on the job. State law typically expects employers to provide this insurance. Rates vary based on the type of business, work being done, and employer’s claims history.
“Federal unemployment tax (FUTA): FUTA is reported and paid independently from social security and Medicare taxes and federal income tax. It is paid only by the employer’s reserve. This is not withheld from employees’ wages.
“State unemployment tax (SUTA): State governments regulate unemployment aid and fix the state unemployment tax rate for each employer. States typically require that companies pay the total unemployment tax.
“Self-employment tax (SE tax): SE tax is a social security and Medicare tax primarily for people working for themselves.
The actual cost of paying employees is significantly higher than their hourly rates. However, payroll taxes regress because the cap on taxable earnings and constant tax rate cause the payroll taxes to decrease as incomes increase.
For companies that do not want to incur payroll processing costs, insurance, and extra taxes, using consulting firms or independent contractors may be a great alternative. While they may cost more up front than a traditional hourly employee, it may be beneficial in the end by avoiding paying taxes and handling payroll processing. If you positively need to hire employees, make sure to consider hiring family members first. The IRS offers payroll tax benefits to partnerships and sole proprietors that employ spouses and children. Small-business owners are exempt from paying FUTA and social security and Medicare taxes when they hire children, and can bypass FUTA tax if they hire a spouse.
Costs and Taxes Ratio
The most substantial portion of any business’s expenses is paying employees, which consists of salaries, employee and employer shares of state and federal taxes, paid time off, and several kinds of worker insurance. The ideal ratio of payroll taxes and costs is between 30 and 38 percent of gross revenue to ensure that the organization does not incur losses. In the end, the greater the productivity of the business, the larger the payroll.
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