By Evelyne Kolker
As a business owner, it is your responsibility to keep track of payroll taxes. This is often a perplexing and tedious process. Consulting with a tax adviser or using tax filing software can help you keep track of all the required taxes, but to make it easier on yourself, remember there are three main categories you need to keep track off.
The three main categories that you need to consider for your payroll taxes:
-Social Security/Medicare Taxes
Social Security/Medicare Taxes
Social Security and Medicare Taxes are part of FICA, or Federal Insurance Contributions Act tax. The W-4 form an employee fills out when hired should be used to help determine what sort of deductions your employees qualify for. Keep in mind that minimum and maximum amounts are adjusted each year. For instance in 2011, if your employee is single with no dependents and making less than $9,500 they don’t qualify to be taxed for FICA taxes. On the other extreme, once an employee’s salary exceeds a certain amount, they no longer have to pay a percentage on the excess amount of salary. Both Social Security and Medicare is taxed at a flat tax rate.
Social Security taxes are deducted with each pay check. With Social Security, the employee must pay 6.2% of your salary each year and the employer must pay 6.2% of the each employee’s salary as well, resulting in 12.4% payroll tax for each employee.
The Medicare rate is 2.9%, 1.45% paid by the employee, 1.45% paid by the employer. How often you make these tax deposits is circumstantial, depending on the salary of the employee. Most likely, you will be paying on a semi-weekly or monthly basis.
An employer is responsible for paying an unemployment tax to pay benefits when employees leaves. As an employer, you don’t have to pay a former employee’s unemployment benefits if they are fired for misconduct in the workplace, the employee leave to get married or if the employee quits without good reason.
As an employer, you have to pay both Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Authority (SUTA) taxes, meaning unemployment taxes on the federal and state level. Washington state taxes are paid quarterly, while FUTA taxes may be collected quarterly or annually.
The FUTA covers instances when an employee leaves unwillingly. The FUTA tax is levied on 0.8 percent of the first $7,000 of wages earned by an employee each year. This means that the FUTA tax per employee can, at the maximum amount, be only $56 per year. This is because the this tax is paid to the National Labor Department, which provides states with funding to handle unemployment programs, rather than funding the programs itself.
In Washington state, the average unemployment tax rate in 2011 is 2.44%; the rate an employer must pay in unemployment taxes varies based off of two components. The experience-rated component of the tax looks at the employer’s layoff history in the last four fiscal years. The more employees have been laid off by the employer in the last four fiscal years, the higher his unemployment tax rate will be. The second component of this tax is a social-cost tax. This additional tax helps cover instances when a company goes out of business and can’t pay unemployment benefits. It also helps in periods of recession when the amount of unemployment benefits being paid are usually greater than the amount of unemployment taxes being collected.
Washington state does not have an income tax, but it does have a Business and Occupation tax (B&O). B&O varies according to the type of business you run. The tax is based off of your gross income, which is the net sales minus the cost of goods sold.
Federal Income taxes is based off the type of company your business is. As a corporation, the entity itself is taxed, paying a corporate income tax. With a partnership, the partners in the company pay taxes individually on their own personal tax returns. The amount each partner is taxed is based off of their income from the company.
As you can see, tax rates and requirements vary based on the type of company, employee salaries, the location of the company, and on many other factors. While the details can be time-consuming to figure out, just keep in mind that for payroll taxes there are three main categories: Social Security/Medicare Taxes, Unemployment Taxes, and Income Tax you need to keep track of.
For filing federal taxes, go online to the Employer Federal Tax Payment System (EFTPS) website. For filing Washington state taxes, use the Employer Account Management Services (EAMS) website.