Are you planning to start your own business this year? If so, you're likely wondering about the various taxes that you'll need to pay.
One of the most important taxes you'll need to contend with is the employer tax. In this article, we'll discuss the employer tax and what it entails.
Now, let’s take a look at the table of content before we dive into employer taxes:
- What is the Employer Tax?
- Employer Payroll Tax Responsibilities
- Employer Payroll Taxes
- FICA Taxes
- Local Taxes
- State Payroll Taxes
- Maximum Taxable Income for 2023
- Other Payroll Costs and Deductions
- Penalties for Missed or Late Payments
- Income Taxes
- Frequently Asked Questions Associated with Employer Taxes
- In Summary
- How Deskera Can Assist You?
Let’s get started!
What is the Employer Tax?
The employer tax is a tax that businesses must pay when they hire employees. This tax is levied on wages paid to employees, as well as any bonuses or benefits that are given to those employees.
The amount of the employer tax depends on how much money the business makes. The employer tax also applies to self-employed individuals who earn income from their own businesses.
Employer taxes refer to various taxes that employers are required to pay. Further, these taxes may include Social Security and Medicare taxes, federal and state unemployment taxes, and state and local income taxes.
In some cases, employers are also required to pay payroll taxes, workers' compensation taxes, or taxes related to employee benefits.
Employer Payroll Tax Responsibilities
Employers are still responsible for payroll taxes even after paying their employees. The company is also responsible for
- Paying payroll taxes on the employer's behalf
- Depositing into a bank account the taxes withheld from employees' salaries
- Preparing a number of reconciliation reports
- Payroll costs are taken into account in their financial reporting.
- Filing of payroll tax returns
Employer Payroll Taxes
Payroll taxes must be paid in full by employers. These taxes are an additional charge over and beyond an employee's gross pay. The following are incorporated into the employer's payroll tax contribution:
- Medicare taxes of 1.45% of wages
- Federal unemployment taxes (FUTA)
- State unemployment taxes (SUTA)
Note: Employers will pay 7.65% of the total FICA tax in 2023, with 6.2% going to Social Security and 1.45% to Medicare (the same as in 2022).
- 6.2% of the first $160,200 in salary is subject to Social Security taxes, with a maximum rate of $9,932.40, plus
- 1.45% Medicare tax is applied to the first $200,000 in wages ($250,000 for joint returns; $125,000 for married taxpayers filing separate returns), plus any other applicable taxes, plus
- A Medicare tax of 2.35% is levied on any wages above $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). This tax consists of the basic Medicare tax of 1.45% and an additional Medicare tax of 0.9%.
For 2023, the independent contractors' self-employment tax is:
- Self-employment taxes on the first $160,200 of income are 12.4% with a maximum levy of $19,864.80 (12.4% of $160,200).
- The first $200,000 of self-employment income is subject to a 2.9% Medicare tax plus other taxes (or $250,000 of combined self-employment income on a joint return, $125,000 on a return of a married person filing separately).
- The tax rate is 3.8% (2.9% normal Medicare tax + 0.9% additional Medicare tax) for any self-employment income exceeding $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).
The Federal Insurance Contributions Act is referred to as FICA. Social Security and Medicare taxes are both included in the FICA tax. Both the employer and the employee are responsible for paying FICA taxes. Half of these taxes are paid by each party.
15.3% is the total of the two FICA taxes, and it is determined as follows:
Depending on where your company is located, additional payroll taxes may be due (Zip code, county, or municipality). These taxes can be used to fund a range of regional initiatives that promote production and trade, like transportation. They could be taxes that the employee or you, the employer, are accountable for, or they could be both.
To find out more about your local tax obligations, speak with your local tax authorities and an accountant in your area.
State Payroll Taxes
In addition to federal taxes, you can also be responsible for state payroll taxes. State unemployment insurance (SUTA tax), the most prevalent state payroll tax, is entirely the responsibility of the employer.
You pay unemployment insurance in accordance with what tax authorities refer to as a wage basis, which is a ceiling on the salaries that are subject to a certain tax. States have different salary scales and tax rates.
To learn your rates, get in touch with the agency that oversees unemployment insurance in your state, such as the department of workforce development.
You may pay state unemployment taxes as part of your paycheck or as a separate payment every month or quarter. It further depends on the alternatives available in your state.
Many governments collect extra payroll taxes for items like transit, disability insurance, and workforce development. To find out which taxes your company must pay or withhold from employee paychecks, speak with an accountant in your state.
Maximum Taxable Income for 2023
The amount of any employee's wage that is subject to the Social Security levy is capped annually by the Social Security Administration. The contribution and benefit base are what we refer to as, and it changes every year.
In 2023, $147,000 will be the highest wage figure that will be subject to Social Security tax.
Because there is no maximum taxable income for Medicare tax, you and the employee would still split the 2.9% tax on earnings beyond $147,000 even if they weren't subject to Social Security tax.
Furthermore, the wage basis that is liable to both federal and state unemployment taxes is also modified annually. Based on the appropriate pay bases, a cap is placed on the number of wages that are liable to the FUTA and SUTA taxes.
Other Payroll Costs and Deductions
Depending on the rules in your nation or the extra benefits your company offers, you might be required to pay more at payroll than just your tax duties. These might include:
Medical Healthcare Costs
The Affordable Care Act generally requires businesses with more than 50 employees to provide their workforce with health insurance.
Furthermore, you may want to provide a plan if you own a smaller business. Any premium payments made by the employee, which will be withdrawn from their pay at payroll, will be your responsibility for the employer's part.
State Disability Insurance
In California, New Jersey, New York, Hawaii, Rhode Island, and Puerto Rico, employers are required by law to sponsor programs that compensate employees' earnings in part for time missed from work due to disability or caregiving.
If your organization gives paid time off for personal, vacation, sick, parental, or other reasons, you must record paid time off requests as part of the payroll process.
Even though an employee's normal pay remains the same, compensation provided as part of their paid leave benefits is frequently reflected on their paychecks.
Workers' Compensation Insurance
The states establish requirements for workers' compensation insurance. Whether you must pay and how much depends often on how many employees you have in the state, with three being a typical threshold.
Reimbursements and Stipends
For instance, if you give an employee a stipend for a home office or reimburse them for business expenses, you normally manage those payments through payroll and include them in the employee's income.
Since reimbursements and stipends are taxed at rates different from those of ordinary income, it is crucial to classify them correctly.
Retirement Plans Contribution
Payroll administration is necessary if your business offers an employee retirement plan since it handles contributions. Payroll deductions for employee contributions and any company matching payments.
An employee may have designated a different amount to be deducted from each pay month on their W-4. If so, you must deduct that amount from their federal income tax payment and add it to it.
Additional incentives will also be administered through payroll. In addition to other employee benefits, it also incorporates HSA contributions, wellness initiatives, charitable matching and deductions.
Depending on the benefit, you may transfer funds to a connected account, deduct employee contributions from the benefit, or increase the employee's income with a stipend.
Penalties for Missed or Late Payments
If you don't make the required employment tax payment by the due date, the IRS will charge you a late fee called as a Failure to Deposit Penalty. If there is a penalty you need to pay, the IRS will let you know.
Payroll tax penalties includes:
People usually refer to FICA, FUTA, as well as any other state or municipal taxes when they talk about "payroll taxes." The other big tax you pay as a business when you process payroll is employee income tax.
Federal, state, and municipal income taxes must be withheld from your employees' paychecks and reported to the IRS and other taxing authorities. Furthermore, any percentage of the federal, state, or municipal income taxes owed by your employees is not your responsibility.
Based on the W-4 they completed when you hired them, you file employee income taxes. You are not in charge of figuring out if the deductions made from each employee's paycheck satisfy the full tax burden as stated on this form.
Frequently Asked Questions Associated with Employer Taxes
Following, we’ve discussed some crucial frequently asked questions (FAQ’s) associated with employer taxes. Let’s learn:
Que 1: What will the 2023 employer FICA rate be?
Ans: In 2023, the employer FICA rate will be 7.65%. FICA tax is paid at a rate of 15.3% for self-employed individuals and 7.65% more for employees.
Que 2: What does an Unemployment Tax Entail?
The Federal and State Unemployment Tax Acts provide funding for unemployment programs that provide temporary financial assistance to those who lose their jobs due to no fault of their own (further referred to as FUTA and SUTA).
FUTA is paid by employers alone; it is not deducted from employees' paychecks. The same is true with SUTA, with a few jurisdictions requiring employees to contribute to the programs as well.
It’s worth getting up to speed with a deep dive that answers the question what is FUTA? That way you can ensure that you are keeping up with your obligations as an employer.
Que 3: In 2023, did Payroll Taxes Rise?
Ans: Although the amount of income to which it can be applied varies every year, the payroll tax rate has not changed since 1990. 15.3% is the FICA tax rate. Each year, the pay base for various state and federal taxes could change.
Que 4: What’s the alternative that can help me to avoid doing everything by myself?
Businesses that want help managing their payroll have a range of options available to them, from simple payroll software to more complex options like co-employment and payroll outsourcing.
Employers who employ these services benefit from better payroll compliance and time savings, enabling them to devote more time to their expanding enterprises.
Employer contributions to federal and state programs are included in the payroll taxes that you and your employees are obligated to pay. It covers Medicare, Social Security, unemployment insurance, and disability benefits.
Furthermore, they also include income tax withheld from the earnings of your employees as well as payroll tax deductions for additional items like health insurance and paid time off.
The federal employment tax, or 15.3%, is 7.65% the employer's responsibility. In addition to the salary or wages you pay them, this raises the expense of workers' compensation, perks, and complying with local and state regulations.
How Deskera Can Assist You?
As a business, you must be diligent with employee leave management. Deskera People allows you to conveniently manage leave, attendance, payroll, and other expenses. Generating pay slips for your employees is now easy as the platform also digitizes and automates HR processes.
Deskera Books can help you automate and mitigate your business risks. Creating invoices becomes easier with Deskera, which automates a lot of other procedures, reducing your team's administrative workload.
Sign up now to avail more advantages from Deskera.
We've arrived at the last section of this guide. Let's have a look at some of the most important points to remember:
- The employer tax is a tax that businesses must pay when they hire employees. This tax is levied on wages paid to employees, as well as any bonuses or benefits that are given to those employees.
- Employer taxes refer to various taxes that employers are required to pay. These taxes may include Social Security and Medicare taxes, federal and state unemployment taxes, and state and local income taxes.
- The Federal Insurance Contributions Act is referred to as FICA. Social Security and Medicare taxes are both included in the FICA tax. Both the employer and the employee are responsible for paying FICA taxes. Half of these taxes are paid by each party.
- In addition to federal taxes, you can also be responsible for state payroll taxes. State unemployment insurance (SUTA tax), the most prevalent state payroll tax, is entirely the responsibility of the employer.
- The amount of any employee's wage that is subject to the Social Security levy is capped annually by the Social Security Administration. The contribution and benefit base is what we refer to as, and it changes every year.
- In California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico, employers are required by law to sponsor programs that compensate employees' earnings in part for time missed from work due to disability or caregiving.