There are different types of taxes that every small business owner should be aware of, but one of the most important ones is payroll taxes. These are taxes that employers need to pay on behalf of employees, and they’re very similar to income taxes in many ways. But what’s really important here? What should you do to make sure you’re always on top of these tax obligations? Let’s go over everything you need to know about payroll taxes below!
Federal Insurance Contributions Act (FICA)
FICA taxes are a payroll tax assessed on employers based on their employee’s wages. The employer is responsible for withholding from each paycheck and depositing it with the IRS. The FICA tax consists of two parts: Social Security (OASDI) and Medicare (HI). Each rate can be broken down further into its component parts. For OASDI, employers pay 6.2% on total wages paid to each employee, up to $118,500 in 2016; employees pay 0% on any amount they earn over $118,500.
Federal Unemployment Tax Act (FUTA)
The FUTA tax is collected by employers at a rate of 6% for an annual maximum amount of $7,000. The revenue collected through this act helps pay unemployment benefits when employers are unable to pay employees. The act also pays for public employment service activities in order to help individuals find work. However, you don’t have to worry about paying FUTA if your company has fewer than $1,500 worth of wages in any given quarter or $20,000 per year or less in total wage payments across all employees. Also note that only non-farm businesses are subject to FUTA; farming businesses don’t need to worry about it.
Federal Income Tax Withholding
In addition to withholding FICA taxes, payroll services can also withhold federal income tax. This may sound unnecessary for a small business owner with only one or two employees, but it’s actually a good idea. If you don’t withhold tax from your employees’ paychecks, they may be liable for income taxes on their full paychecks throughout the year, rather than getting a refund at year’s end. Also, there are penalties if you fail to withhold enough federal income tax from an employee’s paycheck. The IRS has strict guidelines for calculating withholding allowances and it’s best not to rely on an employee telling you what their allowance should be; instead use software or consult your accountant when figuring out how much you need to withhold in each paycheck.
State Payroll Taxes By Small
Depending on where you live, your state may impose a payroll tax. This is a per-employee fee that is paid in addition to federal and Medicare payroll taxes. When calculating your total tax liability, you must pay state payroll taxes in addition to federal and Medicare payroll taxes. The exact amount of state payroll taxes depends on your location. In California, for example, it’s 0.55% of all wages paid by employers who have been in business for less than five years and 1% after that time frame has expired (note: these rates do not include unemployment insurance tax). Once again: these fees apply in addition to Federal and Medicare Payroll Taxes.
All states require employers to provide workers’ compensation insurance. Workers’ comp is insurance that covers medical bills, income loss, and other damages if an employee is injured on your business premises or while working for you. This coverage protects both employees and businesses, but it can be difficult for small-business owners. If an employee causes an accident that injures someone else, his or her claim will go against your worker’s comp policy. The consequences are serious: premiums are likely to skyrocket, making it hard for you to hire employees or grow your business. Here are a few steps you can take to protect yourself against risks related to worker’s compensation insurance policies
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Use Payroll Software
Employers should look for Payroll software for small business in specific. It can help you with tax compliance, filing taxes, payroll, calculating paychecks, and more. Tax time will be much easier when you have all of your employee’s information in one spot. This will also allow you to see what deductions are being made from your employees’ paychecks at one time so that there are no surprises come tax season. Payroll software will save you countless hours during tax season because it does all of your calculations for you. Not only does it calculate payroll taxes, but many programs include tips reporting as well as overtime payments so there is no need to use an additional system or program for those purposes.