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A Guide Regarding Payroll Taxes Applying to Small Businesses

Published by Payroll Service Solutions on November 1, 2021

Payroll taxes include federal, state, and local taxes paid by the employer and employee to fund government programs such as Social Security, Medicare, and unemployment compensation. As an employer, it is your responsibility to withhold appropriate taxes from your employees’ paychecks and make payments to the appropriate tax agency.  A portion of payroll taxes is employer paid and the other portion is employee paid. 

Types of Payroll Taxes

There are different types of payroll taxes some paid by the employee, some the employer and other taxes paid by both.  They include:

Federal Income Tax

The federal income tax depends on the W4 completed by the employee.  Federal taxes allow an individual to claim dependents each pay rather than getting the credit when personal taxes are filed.  It is always good to review this with your tax preparer, so you don’t have any surprises.

FICA Taxes

The Federal Insurance Contributions Act (FICA) encompasses three different types of payroll taxes. They are:

i. Social Security Tax

The employer and employee are also required to pay the Social Security tax to the IRS. The amount comes to 6.2% of taxable wages for both the employee and employer. 

ii. Medicare Tax

The Medicare tax is 2.9% of the employee wage and is split equally between your company and your employee. Thus, you will have to hold 1.45% of your employee’s paycheck and match it with another 1.45% to be paid to the IRS.

iii. Additional Medicare Tax

When an employee’s income exceeds a specific amount, they are required to pay an additional Medicare tax. This amounts to 0.9% of their income.

State and Local Payroll Taxes

Employees are required to pay State withholding taxes generally in the state that they live in.  These rules can vary depending on the state.  State tax rates depend on the state.  Most states use a bracket, but PA uses a percent of tax 3.07%. 

In PA employees pay the higher of the local tax rate based on where the live and work.  Philadelphia has the highest local tax rate in PA.

Federal Unemployment Tax Act (FUTA) Taxes

Employers are required to pay 0.6% on the first $7,000 of your employee’s wage as FUTA tax.  This is $42 per employee per year.  This tax is employer paid only.  

State Unemployment Tax Act (SUTA) Taxes

Employers are required to pay SUTA tax on behalf of their employees. In some states an employee contributes to SUTA, which can be referred to as SDI tax.  This is generally a small portion as the employer pays the most.  

The process of calculating and paying payroll taxes can be complex and overwhelming for a person running a small business. Besides, you will have to always keep up with the latest changes in rates and regulations. Any mistakes can attract steep penalties. Outsourcing your payroll allows you to ensure smooth payroll processing, tax calculations, and payments. It can free up your valuable time so that you can focus on your core business activities. When it comes to payroll processing, you can trust Payroll Service Solutions to handle all the details. Let’s discuss what we can to make things easier for you. Call us at (215) 624-0922 or send us your queries using this Contact Form.

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