As a business owner, there are multiple taxes that you are responsible for withholding from your employees and paying yourself.
What businesses are responsible for:
As a business owner with employees, you will be responsible for two things when it comes to payroll taxes:
- deducting a portion of your employees pay to pay the tax liability on their behalf. This includes:
- federal and state income tax based on your employees W4 form.
- the employee portion of social security and Medicare taxes.
- paying the company share of payroll taxes on each employee. This includes:
- social security and Medicare taxes.
- state and federal unemployment taxes.
Overall, most small businesses pay an average of 10% of employee wages in required payroll taxes on top of the wages they pay to employees. These taxes are divided up and cover a number of items.
Social Security & Medicare Taxes
The Federal Insurance Contribution Act, or FICA, began in the 1930s and is a law that states employees and their employers must make contributions to Social Security and Medicare programs. This Social Security & Medicare Tax is shared by an even 50/50 split between the employer and the employee. The current total rate for this tax is 15.3% of employee wages. The social security portion is currently 12.4%. Employees and employers each contribute 6.2% of wages to social security tax. The current Medicare portion of this tax is 2.9%. Employee and employers each contribute 1.45% of wages to Medicare tax.
Unemployment Taxes
There are two different types of unemployment taxes. They are:
- Federal Unemployment Tax
- State Unemployment Tax
Federal Unemployment
The Federal Unemployment Tax, or FUTA, covers a portion of unemployment benefits at the federal level. Businesses are required to pay the full amount of this tax. The current federal unemployment tax rate is 6% on only the first $7,000 of wages paid to employees in a calendar year. However, because there are state tax credits in play in most states, businesses usually only end up paying 0.6% of employee wages to federal unemployment benefits.
State Unemployment
State Unemployment Tax, or SUTA, funds the unemployment trust run by each state. Each employer is “rated” by the state and issued an unemployment tax rate annually to contribute on behalf of each employee. For the state of Maine, unemployment tax is paid only on the first $12,000 in wages. The individual rate varies by company, however, the “new employer rate” for 2022 is 2.24% of wages.