One of the most important things to remember as a business owner is that you need to deduct certain taxes from your employee payroll. In the United States, this includes payroll withholding taxes, which need to come out of your employees' gross wages, salaries, bonuses, and other compensation.
Typically, this involves withholding from an employee's compensation and paying a contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). It may also include withholding from federal or state income tax, and some cities and states may require even more payroll taxes. Once you've deducted these taxes from your employees, you're required to remit the amount due in a timely manner to the appropriate government.
Which Payroll Taxes Apply to Your Employees?
The proper, and prompt, payment of FICA taxes is your biggest withholding and payment obligation as an employer. FICA taxes are also unique in that you are required to withhold from an employee's wages as well as your own portion of the taxes that must be paid.
FICA, short for the Federal Insurance Contributions Act, is the federal law that requires you to withhold three separate taxes from the wages you pay your employees:
- a 6.2 percent Social Security tax;
- a 1.45 percent Medicare tax
- a 0.9 percent Medicare surtax when the employee earns over $200,000
You must also pay the employer's portion of two of these taxes, the 6.2 percent Social Security tax and the 1.45 percent Medicare tax (the “regular” Medicare tax). The Social Security tax, also called OASDI, is subject to a dollar limit, which is adjusted annually for inflation. However, there is no annual dollar limit for the 1.45 percent Medicare tax.
You're not required to pay a portion for the 0.9 percent Medicare surtax on high-earning employees (which is sometimes referred to as the Additional Medicare Tax).
How to Calculate Withholdings and Your Portion
To determine how much you must withhold and how much you must pay in Social Security and regular Medicare taxes, multiply each employee's gross wage payment by the applicable tax rate. And remember, the Social Security and regular Medicare taxes owed are unaffected by the number of withholding exemptions an employee may have claimed. To figure out how much you need to withhold for the Medicare surtax—with no matching payment required by you—calculate 0.9 percent on wages, compensation, and self-employment earnings above $200,000 that is based on the employee’s filing status.
In the video below, our Tax Manager, Ashley Hamilton, explains how payroll taxes are calculated:
Sound complicated? It can be. But Complete Payroll makes it simpler. Learn more about our payroll processing services here.
Check out our comprehensive employer's guide to payroll taxes - 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.