New employers have certain obligations in terms of payroll taxes. Whether they handle payroll in-house or outsource it to a company like BenefitMall, employers are responsible for withholding, reporting, and paying federal and state payroll taxes.
If you are just getting started as an employer, it is incumbent on you to fully understand the tax laws. Payroll taxes are a good place to start inasmuch as every employer is required to pay them. Below are five things you need to know, compliments of BenefitMall.
1. Social Security Taxes
Federal law requires employers to pay Social Security taxes out of payroll funds. For administrative purposes, it is common for Social Security and Medicare taxes to be lumped together under the FICA classification. But for the purposes of this article, each will be explained separately.
Social Security taxes fund what the Social Security Administration currently pays out to beneficiaries. Despite what many people believe, the alleged Social Security trust fund does not exist as a cash account. It exists only in the form of government IOUs. What workers pay into the system today is not set aside in an account to be accessed at retirement. It is used to fund the benefits seniors are receiving today.
Social Security tax is equal to 12.4% of an employee’s earnings for that pay period. Both employer and employee pay half that total, or 6.2%. If you consider the fact that the employer’s portion could be given to the employee as pay if Social Security tax were not assessed, you could make the case that the employee ultimately foots the entire bill.
Also note that Social Security taxes are capped. Only the first $128,400 is taxable. Anything over and above that is not subject to Social Security tax.
2. Medicare Taxes
Medicare is the government health insurance program for seniors. It is funded by an additional payroll tax assessed at a total of 2.9%. Like Social Security tax, employer and employee split the bill between them. Unlike Social Security though, there is no cap on Medicare tax. An employee’s entire pay is subject to the full 2.9% tax.
3. Supplemental Security Income
The government’s Supplemental Security Income (SSI) program is administered by the Social Security Administration, but it is not funded through payroll taxes. Rather, the government taps into other sources.
4. State and Local Payroll Taxes
Some states and local municipalities assess extra payroll taxes above and beyond what the federal government collects. Each of these taxes is assessed at its own rate as determined by law. Some require contributions from both employers and employees; others are assessed on employers only.
The key thing to remember here is that these additional payroll taxes differ from one location to the next. As a new employer, you probably do not have to worry about multi-state operations just yet. But should you branch out into neighboring states at some point, you are going to have to become familiar with a new set of payroll tax regulations.
5. Payroll Taxes and Contractors
The last thing to note is that payroll taxes are not your responsibility when you are dealing with contractors. Because contractors are self-employed under the law, they handle payroll taxes on their own. You pay them a set fee based on what you negotiated; they file and pay their taxes.
If all of this seems a bit complicated, BenefitMall recommends starting out with a third-party payroll provider right from the start. Leaving your payroll to a professional service provider saves you the headaches so you can concentrate on growing your business.