3. Social security, Medicare, and federal unemployment taxes
This category encompasses federal, state, and local taxes (if applicable) that both an employer and his or her employees are required to pay. All employees and employers are responsible for making Social Security and Medicarecontributions. Employers are solely responsible for paying federal unemployment tax payments.
For tax year 2019, the federal tax rates are as follows:
- Social Security: 6.2% of an employee’s gross wages, up to $132,900 for each employee
- Medicare: 1.45% of gross wages with no earning limit
- Federal Unemployment Tax: 6% of gross wages, up to $7,000 for each employee
Let’s start with Social Security and Medicare. Your employees’ wages determine the final amount you, as a business, will pay. Start by deducting the applicable percentages — 6.2% for Social Security and 1.45% for Medicare — from the employee’s gross wages. Do this for every employee you have.
After you have a sum total of your employees’ contributions, you must match that contribution. Once all payments are pooled, the business is responsible for making this total payment on behalf of the company and its employees.
For example, let’s say that you own a business that just hired its first employee, named Frank. Frank is paid bi-weekly, works 40 hours per week and receives an hourly wage of $14. Based on two weeks of wages at $1,120 ($14 per hour x 80 hours), here is how you calculate the total Social Security and Medicare portion of payroll for Frank and the business:
- The Social Security tax deducted from Frank’s wages: $1,120 x 0.062 = $69.44
- Your matching Social Security tax amount: $69.44
- The Medicare tax deducted from Frank’s wages: $1,120 x 0.0145 = $16.24
- Your matching Medicare tax amount: $16.24
- Total = $171.36
The total Social Security and Medicare tax due for this pay period is $171.36, consisting of contributions from both Frank and your business.Social Security and Medicare tax payments are due either semi-weekly or monthly, depending on your small business’s payment circumstances. They’re reported quarterly using IRS Form 941. Don’t be late with payments, as you can be slapped with a penalty of up to 15% of the missed amount.
There are some types of wages, fringe benefits, and other remuneration that you don’t have to pay Social Security or Medicare taxes on. IRS Publication 15-Bcan help you calculate these taxes correctly. Also, section 15 of IRS Publication 15 has a helpful table summarizing different types of employee pay.
Now, consider Frank when it comes to paying the Federal Unemployment Tax . Let’s say that he was hired only two weeks ago and that his total gross income is $1,120. Since his gross income is less than the maximum taxable amount ($7,000), you would multiply $1,120 by 6%, or 0.06, which comes to $67.20. This is a sum that the business itself must pay. It is not deducted from Frank’s earnings.
FUTA payments in excess of $500 in a given fiscal quarter are due one month after the close of that quarter. If your FUTA bill is less than $500, you can carry it over to the next quarter. FUTA payments must be reported annually on IRS Form 940.
Like FUTA, state unemployment tax, or SUTA, is also paid by employers. Rates and wage bases vary by state. Most states also require employers to pay into a workers’ compensation insurance fund. Rates for workers’ compensation insurance are determined by the region of the country, the industry, and the employer’s own history of workplace accidents.