What exactly are these payroll taxes, might you ask? There are four categories of taxes, which we’ll break down here:
1. Taxes you and your team have to pay
You and your employees contribute to it at a rate of 6.2 percent of your employees’ gross wages. This has a wage base of $127,200 in 2017, so if your employee makes over that amount in a year, the contributions will end once they hit that limit.
You and your employees contribute to it at a rate of 1.45 percent of their gross wages. People who make over $200,000 also contribute an additional 0.9 percent after they hit that limit.
2. Taxes only you have to pay
Federal unemployment taxes (FUTA)
The Federal Unemployment Tax Act, or FUTA for short, is there to provide a buffer for people who have recently lost their jobs. Employers have to pay 6 percent toward FUTA, and companies who pay their state unemployment taxes on time can receive a credit up to 5.4 percent towards their FUTA tax rate. After all is said and done, the FUTA tax rate equals 0.6 percent of all taxable wages — up to the first $7,000 earned for each employee. You can expect it to be in the ballpark of $42 per worker, per year. However, employers in certain states may not receive the full 5.4 percent credit towards their FUTA tax, due to the FUTA credit reduction which is determined each year. Current states subject to a FUTA credit reduction can be found at the US Department of Labor.
State unemployment taxes
Just like FUTA, state unemployment insurance (SUI) taxes are paid by employers as a safety net for people who are looking for a new gig. Nearly every state has a different tax rate, which is usually determined by the type of business you have and your history with unemployment claims. Head over to the US Department of Labor’s state law website to learn more about your particular rate. If are you are based in Alaska, New Jersey, or Pennsylvania, you also withhold an employee contribution of SUI taxes.
3. Taxes only your employees have to pay
Federal income tax
This tax is paid by employees only and is calculated off of their total income, filing status, and personal exemptions. Excluding any deductions, the minimum federal tax rate is 10 percent and the maximum federal tax rate is 39.6 percent for any income over $415,050 (for single filers) or $466,950 (for married joint filers) as of 2016. Check out the estimated 2017 federal income tax brackets here. To calculate the amount to withhold each paycheck, the employer withholding tables are also published by the IRS
State income tax
Most states collect income tax too. New York and California typically have the highest rates, but it can vary by year.
On the other end of the spectrum, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a personal income tax on wages. For you business owners out there, note that Tennessee does tax interest and dividend income.
4. Local & county taxes
There are also a grab bag of taxes out there that are based on the city, county, or municipality that you work in. Typically, most companies are only required to withhold taxes for counties where there’s a work location, like a cafe, office, or construction site. So if an employee lives in a county that’s different from where they work, companies may choose to lend them a hand by withholding their local residential taxes as well. Withholding may be required in their resident location, so it’s always a good idea to check the rules in your local jurisdiction.Updated September 26, 2017
This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.