As you start a new business, the calculations surrounding payroll taxes may not be the first thing on your mind. You’re more likely thinking about bringing in new clients, promoting your services and developing your business plan.
However, you are aware that properly paying your employees is a core part of being an employer. You want to make sure you get the basics right so your employees don’t have trouble with their paychecks. And you don’t want to get tangled up in a web of corrections for mistakes you could otherwise avoid.
Let’s go through the basics of what you need to know, and we’ll also link to a handy graphic you can refer back to so you can save some time and possibly money on calculating payroll taxes.
THE W-4 AND OTHER FUN STUFF
Employees will need to fill out a W-4, also called the Employee Withholding Allowance Certificate. Your state may have a withholding form as well.
The forms will help you calculate tax deductions.
Before the tax calculations, though, you’ll need to know your employees’ gross pay and overtime for non-exempt staff.
- Gross Pay = hours worked in a pay period X hourly rate of pay.
- Overtime = at least 1.5 times the hourly rate of pay after 40 hours worked.
Exempt workers (i.e. salaried employees) are not owed overtime.
BREAKING DOWN THE TAXES YOU OWE
Employers are required to withhold the following from their employees’ paychecks:
- Federal and state income taxes
- Social Security and Medicare taxes
- FUTA (Federal Unemployment Tax Act) taxes
- SUI (state unemployment insurance) taxes
The W-4 will help you determine federal income taxes, listing things like marital status and dependents. You’ll have to comb through the federal income tax tables to get the right amount.
Each state has its own formula, which you will have to calculate. There may also be specific local income taxes to collect.
Social Security and Medicare are a little easier to deal with, because they have a set percentage—6.2 percent for Social Security; 1.45 percent for Medicare.
FUTA and SUI
These taxes are unique because they are paid only by the employer in most states.
- FUTA rates are 6.0 percent for all employers
- SUI rates are different depending on the employees’ salaries as well the state you’re in and how long you’ve been in business
As you can see, calculating payroll taxes can be a complicated procedure. And there is the risk of facing some stiff penalties should something go wrong, not to mention the risk of losing your employees’ trust. So make sure you understand the basics as you start your business. If you don’t want to sweat payroll taxes, it may very well be a good idea to get some help, be it through your accountant or a payroll service that does the calculations for you.
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Andy Roe is the general manager of SurePayroll, Inc., a Paychex Company. SurePayroll is a provider of easy online payroll services to small businesses. SurePayroll compiles data from small businesses through its Small Business Scorecard optimism survey, and exclusively reflects the trends affecting ‘micro businesses’ in the U.S.—companies with one-to-ten employees. You can follow Andy on Twitter @AndrewSRoe.