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Payroll Taxes - A Complete Employer's Guide

A structured and simple overview of what employers need to know about the taxes that flow through payroll - on both the employer and employee side. If you run a small business or work in payroll, these are topics you must understand.




    When entrepreneurs and small business owners imagine their companies growing, becoming more profitable, and needing the support of more employees, they often think about all of the exciting things that are going to happen with that growth. Building a company culture, increasing profits, and gaining more and more customers--these are some of the most exciting parts of being an entrepreneur.

    Payroll taxes are not one of the exciting parts.

    In fact, for many small business owners, understanding payroll taxes and then implementing an effective payroll tax management system can be one of the most complicated parts of hiring their first employees.

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    At Complete Payroll, we are experts in setting up and maintaining payroll tax systems. We want to help you figure out everything you need to know. So let’s break down the most important pieces of information you need to know about ensuring that you are compliant with all federal and state payroll tax laws.

    Watch a Quick Explanation

    In the video below, our Tax Manager, Ashley Hamilton, explains how payroll taxes are calculated.


    What are Payroll Taxes?

    Payroll taxes look different from nation to nation, but a simple definition is that these taxes are imposed on either employees or employers (or both!). Typically, the amount paid by the employer or the employee is based on a percentage of the employee’s salary.

    There are a number of different kinds of payroll taxes, including:

    Withholding Taxes

    According to Investopedia, “A withholding tax is an amount that an employer withholds from employees' wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year.”

    Pay-As-You-Earn (PAYE) Taxes

    This is a subcategory of withholding taxes that is used primarily in the United Kingdom and in Australia, although the unique aspect of PAYE taxes is that they are treated as a sort of advance on the income tax bill that would be due at the end of the year. Typically, employers are the ones who calculate this amount, but with the government’s approval.

    Employer-Paid Taxes (FICA)

    Some taxes don’t come from the employee’s salary, but from the employer, based on the salary they provide. These amounts tend to cover programs like social security, Medicare, and other insurance programs. In the United States, FICA stands for Federal Insurance Contribution Act and funds Medicare and Social Security.

    Who Pays Payroll Taxes?

    Although some taxes are paid by the employer and some by the employee, the burden ultimately falls to the employee. This is because employers often accommodate for certain taxes they are responsible for by lowering the wage or salary.

    Not every state collects payroll taxes. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not collect payroll taxes from their employees’ income, while New Hampshire and Tennessee only collect income tax from investment-based income.

    Watch a Quick Explanation

    In the video below, our Tax Manager, Ashley Hamilton, explains everything employers need to know about the new ECE Tax in New York State.


    Calculating the Employee’s Payroll Tax Withholdings

    The employee is the one who gets to determine whether or not taxes will be withheld from their paycheck, and how much. If they choose to, employees can receive their entire paycheck and then owe taxes at the end of the year. However, most employees choose to have funds withheld to avoid a large tax bill every year.

    You are responsible for withholding the amount that your employees choose via their W-4. They will provide you with their marital status, the number of allowances they can take, and then any additional funds they want to have withheld. You use those numbers to determine the exact amount withheld from their salary.

    Browse Employer Forms - Complete Payroll

    Browse Employer Forms

    Click here to browse a complete list new hire state and federal withholding forms.

    Employee Onboarding Guide

    Employee Onboarding Guide

    Read our comprehensive guide to effectively onboarding new employees.

    Calculating the Employer’s Payroll Tax Responsibility (FICA)

    As the employer, your portion is determined by calculating a percentage of the employee’s salary. Social Security and Medicare contributions must kept separate. Your contribution to Social Security is 6.2% of the employee’s gross pay, whereas your Medicare contribution is 1.45% of said gross pay.

    Watch a Quick Explanation

    In the video below, our Tax Manager, Ashley Hamilton, explains the difference between federal withholding and FICA withholding.

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    There is a maximum social security withholding set each year, and you will need to ensure that the total being withheld does not exceed that maximum.

    There is also an Additional Medicare tax for some employees. This 0.9% tax is applied to employees who surpass the following income thresholds:

    • Married filing jointly - $250,000
    • Married filing separately - $125,000
    • Single - $200,000
    • Head of household (with qualifying person) - $200,000
    • Qualifying widow(er) with dependent child - $200,000

    Tools Available to Employers for Understanding Payroll Tax

    There are a lot of ins and outs to payroll tax. Entrepreneurs and small business owners often need support in making sure they are fully compliant with payroll tax policies. Because certain thresholds and percentages change from year to year, understanding payroll taxes requires continued knowledge building and information gathering.

    A number of tools exist to help employers.

    • The IRS provides an Employer Tax Guide every year in the form of a downloadable PDF.

    • Several payroll tax calculators can be found online. Our advice is to simply be sure that you are using one with fully up-to-date information so that you don’t up with any miscalculations.

    • Call in the professionals! Many employers end up realizing that payroll tax management is not the best use of their time. Small businesses, in particular, already need the people in charge to be invested in making the company work, not getting bogged down in the details. Let’s talk about when this might be a good strategy in the next section!

    What Other Taxes are Employers Responsible For?

    In addition to FICA and income tax withholdings, all employers are also responsible for paying unemployment taxes. There are federal unemployment taxes (FUTA) and state unemployment taxes (SUTA), and these are calculated using a specific formula provided by federal and state government agencies.

    Get Professional Support for Payroll Tax Management

    Generally, employers don’t outsource payroll tax management while still managing the rest of the tasks associated with paying employees. Rather, they outsource their entire payroll system, and taxes are one of the things within the purview of the hired agency or company.

    Outsourcing your payroll can be a great way for you to be able to focus on the work of running your company, rather than the logistics of managing payroll and employment taxes. As a professional payroll company, we at Complete Payroll think of it like this: by letting us manage this part of your business, you get to commit more time and energy to the things that will make your company great!

    There are generally three main reasons why people choose to hire a payroll company like ours.  

    1. They don’t have time to manage their own payroll and need to outsource these tasks so that they can focus on their job.

    2. They don’t have a dedicated HR department because they are a new, small company, and therefore they don’t have a person or team who can be responsible for the tasks associated with human resources.

    3. They don’t have a strong grasp of payroll taxes and want to make sure they are fully compliant. Entrepreneurs and small business owners are often experts in their industry, but not necessarily in tax and employment law.

    As for why they hire us, specifically, it is because at Complete Payroll, we help thousands of companies around the country. We are professional, innovative, and committed to providing our clients with personal and exceptional support every step of the way.

    We are happy to work with small businesses and entrepreneurs no matter what reason they end up realizing they need additional payroll help! Contact us today to learn more about how we can simplify your business’s day-to-day operations as it relates to payroll, human resources, time tracking, and other compliance concerns.

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