When a business is in its early years, business owners will need help maneuvering through legal and financial matters. Day-to-day operations such as payroll taxes can be intimidating for the business owner who is just starting their own company. Taxes can be quite complicated because employers have to account for both state and federal regulations. Instead of adding to all the confusing jargon, here’s a quick and simple rundown of payroll taxes.
What are Payroll Taxes?
Payroll taxes are taxes incurred on wages paid by both employer and employee. The payroll taxes for employers and employees are comprised of several different components.
The two main federal payroll taxes that employers and employees pay are allocated towards a federal and state social insurance program known as FICA, the Federal Insurance Contributions Act.
This program includes Medicare and Social Security. One should note that payroll taxes are not the same as income taxes, which are taxes paid to the state and federal government from an employee’s wages.
So Who Pays What and How Much?
For employees, the main payroll taxes are the federal tax, state tax, and FICA, which includes both Social Security and Medicare. Certain employee wages are not subject to wage taxation such as employee per diems (under a certain limit), wages earned by family members under 21, students who acquire a job at their university, certain religious groups, and other exceptions. For the full list, visit the IRS website for more information.
On the other hand, employers will pay:
FUTA or the Federal Unemployment Tax
SUTA or State Unemployment Tax or SUI
Self-employed workers will pay a self-employment tax known as SECA, which is an equivalent to FICA since it funds the Social Security and Medicare programs.
Employers and employees will pay an equal share of the FICA tax, with the employer withholding the taxed amount from an employee’s wages.
For Social Security, both employers and employees will pay an equal amount of 6.2%, while employers and employees will pay 1.45% for Medicare. However, the IRS has a cap on the amount of taxable wages. As of 2020, the maximum wage limits are as follows:
For Social Security the maximum wage cap is $137,700 (previously $132,900 in 2019)
Medicare has no wage limit cap
Federal unemployment taxes are capped at $7,000 for employers
Business Owners: Beware of Penalties
After employers set aside the amount to withhold from an employee’s wages, they must also be diligent to set aside the correct amount for their own taxes. In order to avoid penalties, taxes must be paid in the right amount, on time, and deposited in the right way as described by the IRS. Any deviation will incur a penalty.
When depositing payroll taxes, employers will be using the EFTPS Online System as designated by the IRS. Payments made without the system will incur a 10% penalty.
Late payments will also incur penalties. The IRS has a 4-tiered penalty system based on the date of payment.
For payments made 1-5 days late, the penalty rate is 2%
For payments made 6-15 days late, the penalty rate is 5%
For 15 days late, the penalty is 10%
For all amounts unpaid after 10 days of the first notice, the penalty rate is 15%
Keep in mind that if the IRS has reason to believe your company has purposefully evaded tax payments, you could be fined up to half a million dollars and serve jail time.
Payroll is one daunting issue most business owners struggle with, especially when it comes to managing the process themselves. On a smaller scale, payroll taxes can be properly managed with the right tools and resources.
However, if you run a medium or large-scale business, payroll taxes can be incredibly challenging. If managing payroll yourself is too overwhelming for you or if it takes more effort and time than you’d like, consider hiring a third-party to take care of the work for you. There are plenty of large payroll companies that offer these services for your convenience. Here are just a few to consider:
Paycor is a cloud-based payroll service that also provides additional HR services such as recruiting and onboarding. The company is a great option for small businesses on a budget. Services can start at just $49 a month, and the rate for adding employees is just $3 per employee. Paycor’s biggest strength lies in their HR services, which provides regular reports and updates that are both visually appealing and informative.
ADP is another large player in the payroll industry, offering services in payroll, HR, and tax. ADP is a good fit for businesses of all sizes and provides different price points as well as additional services. Depending on the specific plan, pricing can range from $39 a month to $149 per month, with $6 to $12 per employee.
For smaller sized businesses with under 100 employees, Gusto could be the perfect fit for helping you file payroll taxes. Gusto stands out for its easy-to-use service, simple pricing plans, and cloud-based platform.
Plans range from $39 a month to $149 a month, with $6 per employee to $12 an employee. Gusto also provides a benefits brokerage service, which includes health insurance and 401(k) retirement plans.
Intuit, a Quickbooks service, offers payroll services that are easily integrated for businesses using Quickbooks accounting software. However, businesses don’t need to use the Quickbooks software in order to take advantage of Intuit’s flexible options, which include plans suitable for small businesses that need a variety of services. Although it is not a benefits broker, Intuit can also manage employee benefits and deductions.
Onpay is another large payroll company offering cloud-based services to help automate payroll and payroll tax filing. Like its competitors, Onpay also offers employee management features such as planning for retirement. It also integrates nicely with other applications such as Kabbage, Humanity, Quickbooks, and more. Plans start at $36 a month, with $4 per employee.
When it comes to running a successful company, business owners face numerous obstacles: business financing, hiring the right employees, taking care of inventory, and more. Business owners need all the help they can get to overcome each of these challenges and luckily there are plenty of resources available.
Although payroll taxes can seem complicated and overwhelming at first, with the right knowledge and tools, business owners will have no problem making the best decisions for their company.