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Payroll tax basics for small businesses

Payroll tax: the basics every employer needs to know

More Americans than ever choose to start their own business because of frustration with the way things are and a desire to be in the driver’s seat of their own life. According to the newest report by Guidant Financial, 2019 saw a 27% increase in small business owners who started a business because of their weariness with corporate America. 

With the uncertainty of the current climate, it’s likely that even more people will begin to think about starting something of their own. However, when you are creating a business, you come to realize how many responsibilities come included. A very important one among them is payroll taxes.

This article will help outline the basics of payroll taxes every small business owner needs to know about.

Understanding the payroll tax

A payroll tax is typically defined as the one withheld by an employer from the salary earned. The employer then deposits this tax to the Internal Revenue Service (the IRS) on the behalf of their employee. 

In the US, payroll taxes include Federal Income Tax, State Income Tax (in some states), as well as Social Security and Medicare. The last two are divided in two portions and paid for by the employer, as well as from the deposits withheld from the employee salary. 

Keep in mind that some states and local communities could levy additional taxes, and specific employees could be excluded from certain state taxes.  

Taxes withheld from the wages

What: Federal Income Tax as well as State Income Tax (when applicable) have to be withheld from employees’ wages. 

How much: The amount of Federal Income Tax, as well as that of a State and Local Income Tax (whenever applicable), depends on a number of factors and is determined according to the information provided on the employee W-4 form

What: When it comes to Social Security and Medicare taxes (officially known as the Federal Insurance Contributions Act tax or FICA), employee portions are withheld from the wages, and the employers are required to pay a matching amount themselves. 

How much: The current tax rate paid by the employer is set at 6.2% towards social security on the first $137,700 of wages paid, and 1.45% towards Medicare on the first $200,000 of wages (an additional 0.9% on Medicare is paid for wages above $200,000). The employer also collects and deposits the same amount from their employees. 

Taxes paid solely by the business owner

Besides the payroll taxes withheld from employee’s salaries, in the United States money is also collected for the unemployment programs. This tax is called the Federal Unemployment Tax (FUTA) and is paid directly by the employer.

What: Federal Unemployment Tax (FUTA) is paid by employers from their own funds, as it does not get taken from employees’ salaries. 

How much: The total amount is currently set at 6.0%, but most states provide a 5.4% credit, which means that most employers only pay 0.6%.

What: If you are self-employed, and have no employees, you still have to pay a Self-Employment tax as well as income tax. 

How much: The self-employed must cover both the employer and the employee parts of the FICA tax on their own. Because of this, the rate of this tax is set at 15.3%, which makes it resemble the final figure of the taxes paid for the employees and deposited from their salaries. 12.4% goes toward Social Security, and 2.9% towards Medicare. 

If you make over $200.000 as a self-employed, another 0.9% towards Medicare has to be paid. 

Other important facts you need to know

You can pay the taxes online using the Electronic Federal Tax Payment System (EFTPS). State payroll taxes, when applicable, are usually submitted via the state’s own electronic or manual systems. 

Beyond paying the taxes, an employer must submit federal tax filings to the federal government (represented by the IRS). Any state payroll tax filings are submitted to a state agency responsible. W-2 forms also have to be submitted to the Social Security Administration. 

This article serves as a brief overview of the existing payroll taxes in order to assist small businesses who are looking to learn more about the payroll tax. It does not intend to provide full information on the legal questions related to payroll tax. If you have additional questions, please consult a tax or legal professional in your area.


Fanya Becker

Fanya Becker

Fanya Becker is a Synder expert with sound experience in consulting various clients on automation solutions. She researches and provides guidance for small businesses on their path towards automating mundane and recurring parts of their workflow, works with professional accountants, and frequently interviews industry experts to create relevant and forward-looking content for Synder.

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