As a small business owner, you have financial obligations to the government with every employee you hire. When considering the cost of an employee, you need to think of expenses beyond their salary – including how much you’ll need to pay in payroll taxes.
At CSI Accounting & Payroll, we’ve worked with small business payroll for over 50 years. Of the thousands of small business owners we’ve worked with, many have wanted to know the following about payroll taxes:
- What are payroll taxes? Which ones are paid by employers?
- How much do business owners pay in payroll taxes?
- What are other payroll expenses to consider?
Payroll Taxes That Are Paid by Employers
When we talk about payroll taxes, we’re referring to FICA, unemployment taxes, and income tax withholding. We’ll touch on what they are and who pays them in this section, then go into how much they are in the following section.
FICA (Social Security and Medicare)
As an employer, you (and your employees) are responsible for Social Security and Medicare taxes.
Employees are required to pay this tax, but it comes with the expectation that they’ll be able to draw benefits from the funds later in life. For the most part, employers are required to match the amount that the employee pays dollar for dollar with some minor exceptions.
You will need to withhold the amounts from your employees’ paychecks and deposit the correct total employee and employer amounts by your specific tax payment deadline.
State and Federal Unemployment
With the exception of Alaska, New Jersey, and Pennsylvania, these payroll taxes are also paid by the employer.
The rate may change every year (or, in some cases, mid-year). For state unemployment, what you pay is a tax rate, and that rate is based on a calculation using the amount of tax you’ve paid and the benefits paid out against your account over a set period of time. The unemployment office generates the rate based on how much you’ve paid in four years versus how much they’ve paid out against your account.
There are also limits on how much of each employees’ wages you need to pay unemployment taxes on.
Local, State, and Federal Income Tax Withholding
As an employer, you don’t pay this. You’re required to let your employees set aside money for their individual income taxes.
You just need to withhold the money from employees’ pay and remit it as tax payments to the IRS and any required withholding states or local taxing authorities.
In many states, you also need to have employees fill out a separate W-4 for their withholding state. Some states don’t have withholding tax, so you would only withhold federal income taxes in those cases.
How Much Money Business Owners Pay in Payroll Taxes
Now, let’s talk money.
The Example
To keep things simple, let’s say you’re hiring an employee who you will pay $1,000 per week. Then, since we need to name a hypothetical state, let’s say they’re located in Minnesota. (We’re headquartered in Minnesota, but CSI serves small businesses nationwide!) Finally, let’s say the employee has no pre-tax deductions.
How much will you need to pay in payroll taxes?
The Payroll Taxes
Now that you know about FICA, unemployment taxes, and income tax withholding, let’s talk dollar amounts for the example above.
For an employee getting paid $1,000 per week in Minnesota with no pre-tax deductions, the employer pays:
- $62.00 in Social Security. At the time of this article being written, the rate is 6.2%. See the current Social Security tax rate here.
- $14.50 in Medicare. At the time of this article being written, the rate is 1.45%. See the current Medicare tax rate here.
- $11.00 State Unemployment (SUTA). At the time of this article being written, the Minnesota rate ranges from 0.2-9%. However, 1.1% is a very common initial rate for new employers who are not in the construction industry, so we’re choosing that rate for this example. See the current Minnesota state tax rates here.
- $6.00 in Federal Unemployment (FUTA). At the time of this article being written, the rate is 0.6%. See the current FUTA tax rate here. The cap on employee wages that you need to pay federal unemployment taxes on is $7,000. Since you only pay FUTA on this amount of their wages, you will pay a maximum of $42 in FUTA for the year.
In this example, the total amount paid in payroll taxes was $93.50. That comes out to 9.53% – so plan to pay about 10% of your employee’s salary in payroll taxes.
Other Payroll Expenses to Consider
Even after considering your employee’s salary and an approximate 10% added in payroll taxes, there are other expenses you may want to keep in mind.
Most states require you to hold workers’ compensation insurance. There are wide ranges of rates for this, depending on the level of risk for the job. It will land somewhere between 0.25-12% of their salary.
Some employee benefits are required by law, and some are expected in certain industries. Regardless, offering benefits gives you an advantage in hiring and retaining the best employees. Expect to spend between 30-40% of their salary here. If you’re concerned about costs, there are also free perks that you can offer.
Don’t forget about payroll back taxes! If you fall behind on payroll taxes, you’ll have to pay the missed taxes, plus penalties and interest that increase over time. Otherwise, some states will file a return for you with your previous tax liabilities, plus extra penalties and interest. We believe it’s best to bring the issue to a payroll specialist for help.
Don’t Face Unexpected Payroll Expenses!
Now that you know which payroll taxes you pay, how much they are, and other payroll expenses to consider, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about how much a payroll service can cost by clicking the image below:
