Payroll Tax

Let's distinguish between withholding taxes and payroll taxes. Withholding taxes are withheld from an employees paycheck. Payroll taxes are taxes paid only by the employer. Withholding taxes include federal and state income taxes and social security and Medicare taxes.

Payroll taxes are the employer's matching social security and Medicare taxes as well as state (SUTA)and federal (FUTA)unemployment taxes. As a general rule, employers can expect to pay an additional 10% of their gross payroll in payroll taxes. The good news is that Payroll taxes are fully deductible on the employer's tax return.

Here's an example:
If the employee's gross pay is $400.00

Federal income tax withholding	$20.00
State income tax withholding	$8.00
Social Security withholding tax (6.2% x gross pay)	$24.80
Medicare withholding tax (1.45% x gross pay)	$5.80
Net Pay	$341.40

All the above taxes are withheld from the employees net pay and are called withholding taxes. The employer matches the social security and Medicare taxes and these taxes represent the payroll taxes. The employer sends a check to the IRS for $81.20: $49.60 (Social security withholding taxes (6.2% x gross pay)of 24.80 and the matching employer social security taxes of 24.80) plus $11.60 (Medicare withholding (1.45%x gross pay)in the amount of 5.80 and the employer's matching medicare taxes of 5.80) and Federal withholding taxes of $20.00.

Federal (FUTA) and state (SUTA) unemployment taxes are not withheld from the employees paycheck. Instead these payroll taxes are filed and paid (usually quarterly) separately by the employer.

For more information on Federal withholding and payroll tax requirements, check out IRS publication 15, also known as Circular E. For information on State withholding tax requirements, contact your state's revenue department. For information on state unemployment taxes, contact your state's Department of Labor.

Payroll, payroll taxes and workers compensation are facts of life for businesses with employees.  While employees may be absolutely critical to the success of your business, they consume valuable resources that increase your cost of doing business. Make a mistake in calculating payroll withholding taxes and/or paying payroll taxes and you have angry employees and the IRS to deal with.

As you proceed with your business planning, you would be wise to consider purchasing a payroll software program to help process your payroll. Take a look at our payroll software program page to get an idea what types of features and reporting capabilities are important before you buy.