As an employer, you will be responsible for deducting payroll taxes from your employees' salaries to later pay them on their behalf, and in turn, you will have to contribute as an employer your share of these taxes. This means that both the company and the employee are taxpayers.

Employers are required by law to withhold federal income taxes. The amount of withholding depends on several factors, such as the employee's marital status, number of dependents, and the salary amount. The idea is to approximate what the worker owes as income tax at the end of the tax year. The employer may determine the amount to withhold based on the information provided by the employee at the time of hiring (form W-4 Employee's Withholding Certificate) that must be completed prior to the beginning of employment. When the worker files their tax return, the amount withheld by their employer is deducted from the amount owed, resulting in a lower tax payment.

Taxes under the Federal Social Security Contributions Act (FICA) consist of elder, survivors, and disability insurance taxes, known as Social Security contributions, as well as hospital insurance contributions, known as Medicare contributions. These taxes have different rates.

The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, totaling 12.4%. The current Medicare rate is 1.45% for the employer and 1.45% for the employee, totaling 2.9%. To calculate Social Security withholding, multiply your employee's gross wages for the current pay period by the current Social Security tax rate (6.2%). To calculate Medicare withholding, multiply your employee's gross wages by the current Medicare tax rate (1.45%). These taxes are reported on the same form (941) and are reported every three months.

Only Social Security taxes have a wage base limit. The wage base limit is the maximum wage that is subject to tax for that year. For income in 2023, this base is $160,200. There is no limit on the wage base for Medicare tax; all covered wages are subject to Medicare tax.

In addition to Medicare tax, employers are responsible for 0.9% additional Medicare tax on employee wages and compensation that exceed $200,000 in a calendar year, regardless of marital status. There is no employer match for the additional Medicare tax.

Employers file and pay federal unemployment tax (FUTA) separately from federal income tax and Social Security and Medicare taxes. Employees do not pay this tax, nor is it withheld from their pay. The FUTA tax rate is 6.0% (0.060) for 2023. Most employers receive a maximum credit of up to 5.4% (0.054) against the FUTA tax. Each quarter, you must calculate what portion of the first $7,000 of each employee's annual wages was paid by you during that quarter. It is filed on Form 940.

Lastly, there is the state unemployment tax (SUTA), which is a type of payroll tax that states require employers to pay. However, employees in Alaska, New Jersey, and Pennsylvania must also contribute to the tax. State unemployment offices or agencies assign employers a specific tax rate, and this rate can change based on annual assessments. Florida's 2023 SUI tax rates are dated December 22, 2022. The minimum rate is 0.10%, and the maximum rate is 5.4%, except that employers participating in the short-term compensation program may be subject to a maximum rate of 6.4%. New employers pay 2.7% in 2023. The final adjustment factor remained 0.000, and the multiplier decreased to 0.1628 for 2023. The taxable wage base remains $7,000.

If you have employees in only one state, you will only need to comply with that state’s SUTA tax regulations. But if you employ workers in more than one state, that is, if you are a multi-state employer, you must file SUTA taxes for each state in which your employees are located. Each state has its own SUTA regulations, so you should check with your state’s labor or unemployment department or agency for more information that may be relevant to your business.

Below, we will explain the steps to calculate payroll taxes:

1. Calculate gross wages: To determine an employee's gross income, calculate the total amount earned during the applicable pay period. This includes salaries or hourly wages and any additional income, such as bonuses, overtime pay, or commissions.
2. Calculate employee tax withholdings: Once you have the employee's gross wages and the amount of allowances from their W-4 form, you can begin to calculate how much you need to withhold to cover their taxes.
3. Handle deductions: After calculating the employee's tax withholdings, the next step is to take out the applicable deductions. Deductions refer to benefits and donations chosen and paid by employees, which are deducted on a pre-tax or after-tax basis. Some examples of the first group are retirement plans and medical and dental benefits. In the second group are, for example, garnishments (child support, alimony) and union dues.
4. Add expense reimbursements: If an employee paid expenses with his or her own money, he or she should receive reimbursement. All expenses you reimburse employees should be paid in full and added to net pay at the end of your calculation.
5. Add it all up: Net pay is the amount of money you need to send to the employee on payday.

Calculating payroll tax is complex, requires accurate calculations, and a lot of patience. At My Accounting Now, we focus on keeping your accounting up to date. We will save you hours of work each month and prepare your company to file taxes smoothly. Schedule a consultation with our team; we will clarify all your doubts and take the weight off your shoulders. Call us at 786-228-8689 or send us an email to info@myaccountingnow.com.