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small business taxes /
small business payroll

Which Taxes Do Small Business Owners Pay?

September 19th, 2022 | 4 min. read

By Bret Asmussen

It’s hard enough to implement year-round tax strategy, prepare, and file your business taxes - but there’s an added element of difficulty when you’re not sure which taxes you should be paying.

Do you have to pay unemployment taxes? Social Security taxes? What about payroll and income taxes? (And if they do have to be paid, is it you who’s responsible - or your employees?)

CSI Accounting & Payroll has worked with small business taxes for more than 50 years (and payroll taxes for over a decade), so we know a thing or two about the different types of taxes and who’s responsible to pay them

Let’s take a deeper dive into payroll taxes and income taxes - which we consider to be separate taxes.

A road sign with several directions labeled "Tax"

Do Small Business Owners Pay Payroll Taxes?

There are a few different types of taxes that can be considered “payroll taxes.” However, when we talk about payroll taxes, we’re mostly referring to FICA, income tax withholding, and unemployment taxes. These all require work on your behalf (as the employer.)

When you work with a payroll service, you don’t have to worry about managing the following taxes. This can be a big relief for small business owners who are having trouble keeping up with their payroll tax responsibilities!

FICA (Social Security and Medicare)

As an employer, you (and your employees) are responsible for Social Security and Medicare taxes. See the current Social Security and Medicare tax rates here.

Employees pay into these funds with the expectation that they’ll get the money back when they retire. Oftentimes, the amount paid is an employer match, but sole proprietors are responsible for both portions of this tax.

Your role is to withhold the amount from your employees’ paychecks and deposit the correct amount by the deadline. You also need to make sure your employees get credit for their withholding tax.

State and Federal Income Tax Withholding

As an employer, you are required to give your employees an opportunity to set aside money for their individual federal and state income taxes.  This portion of payroll taxes is not paid by the employer; the amounts are withheld from employees’ pay and are your responsibility to remit as tax payments to the IRS and to any of your required withholding states. The amounts are calculated using information collected from Forms W-4. 

In 2000, there was a significant change in the Federal Form W-4, which now uses an individual’s tax filing status as a guideline instead of the traditional form that used an individual’s marital status. 

This change means that in many states, you will now 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.

State and Federal Unemployment

Barring a few states (Alaska, New Jersey, and Pennsylvania), these portions of payroll taxes are paid by the employer. There is a cap on the income an employee makes that you need to pay unemployment taxes on, though. There is a federal unemployment rate that applies to a certain amount of wages paid to each employee per year, and state unemployment taxes vary by state. See the current Minnesota State base unemployment rate here. 

Every year, the rate changes because the unemployment office pays out different amounts - much like insurance. What you pay is a premium, and you pay against the claims on your account. The unemployment office looks at how much you’ve paid in four years versus how much they’ve paid out against your account, and this is how they generate the tax rate.

Minnesota is one of the few states that doesn’t require certain business owners to pay unemployment taxes by default. However, unless you qualify for an exemption, if you have any W-2 employees that are not at least 25 percent owner, you are required to pay state unemployment taxes on any covered wages paid up to the state limit.

Read the complete guide to Small Business Taxes For Beginners

Hire a Monthly Accountant to Manage Your Payroll and Employee Income Taxes

There can be quite a bit that goes into paying the appropriate business taxes! Now that you know the basics of who’s responsible for your employees’ income taxes and payroll taxes such as Social Security, Medicare, State unemployment, and Federal unemployment, you’ll either feel more prepared than ever to manage your business taxes or you’ll be ready to start exploring payroll services.

Payroll services take over a lot of responsibilities that go into payroll. This leaves you feeling more confident in letting go of that aspect of your business and instead focusing on your business’s profitability and growth. 

If you want to have a discussion about if CSI Accounting & Payroll can be a good fit for you, click the button below for a free consultation.

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Bret Asmussen

Bret began working at CSI in 2007. Over the years, he worked his way up from an entry-level marketing position to his current role of manager of our payroll service. Bret is largely responsible for the growth of our payroll division over the last several years. His previous experience and knowledge in sales and management are exemplified in his success here. Bret has a college degree in Computer Networking, a skill that certainly comes in handy in an office environment. Bret is also a Certified Payroll Professional (CPP). Fun Fact: As an active duty member of the United States Marine Corps, he served in Operation Desert Shield and Desert Storm.