3 Tips to Help Small Business Owners Calculate Payroll Taxes

It’s time to bring out that tax calculator. It may not be fun, but calculating taxes and withholding for employees is a critical task for all small business owners. Both withholdings and taxes are dependent upon several factors including (but not limited to) marital status, and allowances. For employers, underpaid tax liabilities can equate to fines, late payment penalties and accompanying interest. And for employees, a hefty bill could surface at tax time when they’re not prepared to cover it. If you are looking for help, payroll software providers like SurePayroll offer several tax calculators on their websites to help you get started.” Whether you plan to pursue help or go it alone, you should review our detailed breakdown of top tips to consider when it comes to each component of payroll taxes and withholdings.

What are payroll taxes?

Payroll taxes are taxes that employers must withhold from employees’ wages and/or pay based on those wages. Common payroll tax components include:

• Federal income tax withholding
• State and local income tax withholding (where applicable)
• Social Security and Medicare (FICA) taxes
• Federal unemployment tax (FUTA)
• State unemployment insurance (SUI)

As an employer, you’re responsible both for withholding the correct amount from employee pay and remitting your share of employer payroll taxes on time. 

1. Federal and State Income Tax

Each time a new employee comes on board, have him or her complete a Form W-4. The inputs, including marital status and allowances, determine the amount of federal income taxes to be withheld from the employee’s wages each pay period. If your employee is unsure of how many allowances to claim or needs additional assistance completing the form, refer him or her to the  federal withholding calculator on the IRS website. Assuming your employees are also subject to state taxation, additional information about income tax withholding can be retrieved from your state's Department of Revenue. Key tip: In the event you are unsuccessful at retrieving a completed Form W-4, the IRS recommends classifying the employee as single with zero allowances when computing the amount to withhold.

2. Social Security and Medicare Withholding

The Federal Insurance Contributions Act (FICA) requires employers and employees to contribute to Social Security and Medicare. The exact rates and wage limits can change annually, so always verify the current year amounts with the IRS. In general:

• Social Security tax: Employers and employees each pay a set percentage of wages up to an annual wage base (the Social Security wage base).
• Medicare tax: Employers and employees each pay a fixed percentage on all covered wages, with an additional Medicare tax applying to higher earners.

You can find the current Social Security and Medicare tax rates and wage base in IRS Publication 15 (Employer’s Tax Guide) and the Social Security Administration’s contribution and benefit base table.

3. Federal and State Unemployment Tax

The Federal Unemployment Tax Act (FUTA) funds unemployment compensation for workers who lose their jobs. FUTA is an employer-paid tax; it is not deducted from employee wages.

The FUTA tax rate is 6.0% on the first portion of each employee’s wages, but most employers can claim a credit of up to 5.4% if they also pay state unemployment tax, which effectively reduces the net FUTA rate to 0.6% in many cases. FUTA applies only to wages up to the federal wage limit for the year.

You can find the current FUTA rate, wage limit, and credit rules in the Instructions for IRS Form 940 on the IRS website.

In addition to the federal unemployment tax, employers are also responsible for State Unemployment Insurance (SUI). With the proper resources on hand and knowledge of the tax code as it relates to your responsibilities, you can ensure withholdings for payroll taxes are calculated properly. Luckily, there’s technology that can make this easier for you. Consider using a software to streamline this process of even consult a small business accountant. It just might be worth it.

Common payroll tax mistakes small business owners make

Even with good tools, small business owners often run into the same payroll tax issues:

• Using outdated tax tables or rates
• Misclassifying workers as independent contractors instead of employees
• Forgetting to remit employer taxes, not just employee withholdings
• Missing filing deadlines for Forms 941, 940, W2, and state returns

The IRS provides updated employer guidance each year in Publication 15, and many small businesses rely on payroll software or a small business accountant to help avoid these mistakes.

In addition to handling payroll correctly, it’s also important to protect your business from the unexpected. Payroll errors, employee claims, and day-to-day operations all carry risk, which is where small business insurance can help.

Frequently asked questions

What payroll taxes do small businesses have to pay?

Most employers must handle federal income tax withholding, state and local income taxes (where applicable), Social Security and Medicare (FICA) taxes, and federal and state unemployment taxes.

Where can I find current payroll tax rates and tables?

The IRS publishes annual employer guidance in Publication 15 and Publication 15-T. Your state’s Department of Revenue or Labor also provides current state withholding and unemployment tax information.

Do I need payroll software to handle payroll taxes?

You can calculate payroll taxes manually using IRS publications and state resources, but many small businesses use payroll software or a small business accountant to help ensure accuracy and timely filings.