Employee Taxes for Small Businesses

Once you choose to hire employees, there are certain taxes your business will need to pay. This article covers the different types of taxes that are often categorized as "Employment Taxes."

Federal Insurance Contributions Act (FICA Tax)


FICA taxes include two types of tax that are paid by all employers and employees: Social Security tax and Medicare tax. Employers are required to match their employees' FICA tax obligations. The result is that an employer and employee each pay one half of the total FICA tax rate.

For Social Security tax, the total rate in 2017 is 12.4%, with an annual wage limit of $127,200. This means that both employer and employee each pay 6.2%. Wages beyond $127,200 are not taxed for Social Security.

For Medicare tax, the total rate in 2017 is 2.9%. There is no wage limit for Medicare tax. This means that both employer and employee each pay 1.45% on all wages. Also, for certain high-income employees, there is an Additional Medicare tax of 0.9%.

Employers are required to withhold their employees FICA taxes on all paychecks and pay the IRS on their employees' behalf. The IRS refers to this as "payroll" tax, along with federal and state level income taxes.

Unemployment Taxes


In addition to FICA taxes, employers are also required to pay unemployment taxes.

Federal Unemployment Tax

The IRS collects Federal Unemployment Tax (FUTA) to help fund unemployment benefits for workers who are in between jobs. The normal rate employers pay is 6% of the first $7,000 they pay each employee.

However, if you pay your state unemployment tax on time, then the IRS reduces their rate by 5.4%. This means that your new FUTA tax requirement would be only 0.6% of the first $7,000 you pay each employee.

Note: The only exception to this is California, where the reduced rate is 1.8%.

State Unemployment Tax

State Unemployment Taxes, also known as SUTA, vary across states. Employers can get a reduced rate on their FUTA tax requirements by paying their SUTA taxes on time.

Every state has its own way of calculating SUTA taxes, and the rate can also depend on the type of business you own. For more information on state withholding taxes, consult with a local accountant.

Workers Compensation


In addition to employee taxes, employers are also required to purchase workers compensation insurance to cover workplace injuries.

The rate of workers comp varies depending on the job. The general rule is that the greater the risk of injury, the higher the rate for insurance. For example, hiring a construction worker earning $30,000 per year may cost your business an additional $4,500 in workers comp insurance, or up to 15% of the employee's salary.

Workers compensation policies for employees working in conditions that are not prone to risk are much cheaper, as low as 0.5% or even less.