More Information About Starting Your Small Business
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Payroll Taxes |
Withholding Taxes
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Employers are responsible for withholding
taxes from employees’ paychecks, sending them to the proper
government agencies, and other employer tax obligations. The major
employer paid taxes (FICA, federal unemployment, and state unemployment
taxes) will be explained later in this section. |
Social Security and Medicare Taxes
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The Federal Insurance Contributions
Act (FICA) provides for a federal system of old-age, survivors, disability,
and hospital insurance. The first three are financed by the social
security tax, while hospital insurance is financed by the Medicare
tax. To learn more about the five major benefits covered by Social
Security taxes (retirement, disability, family benefits, survivors
and Medicare), please refer to the Social
Security Administration’s Web site .
Employers must withhold social security and Medicare taxes from employees’
wages and pay a matching amount. These taxes have different rates
and only the social security tax has a wage base limit. There is no
wage base limit for Medicare tax; all covered wages are subject to
Medicare tax. |
Federal Unemployment Tax |
The Federal Unemployment Tax Act (FUTA),
together with state unemployment systems, provides for payments of
unemployment compensation to workers who have lost their jobs. Most
employers pay both a federal and a state unemployment tax. Only the
employer pays FUTA tax; it is not deducted from the employee’s
wages.
Generally, employers can take a credit against FUTA tax for amounts
paid into state unemployment funds. This credit cannot be more than
5.4% of taxable wages. Those entitled to the maximum 5.4% credit
have an effective FUTA tax rate of 0.8% after the credit. The
IRS has tests to determine whether a particular business must pay
FUTA tax.
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State Unemployment Tax |
State unemployment taxes are also
paid by the employer and are not deducted from the employee’s
wages. Each state has a different rate and different wage limits from
which the taxes are calculated. For information on state-specific
unemployment taxes and contact information for the agency that administers
your state’s unemployment tax, use the Business
Owner’s Toolkit. |
Payroll Services |
Generally, hiring a payroll service
is a good idea for businesses in which payroll isn’t the same
from pay period to pay period. Businesses with hourly employees or
employees earning commissions can save time and money by using a payroll
service. One of the chief benefits is avoiding costly mistakes in
payroll processing like failing to remit payroll taxes in a timely
manner. Payroll companies calculate the amount of each paycheck and
the tax obligations for each employee; print the checks; and provide
payroll reports. |
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