Every business owner with employees needs to understand payroll taxes. If you are a small business owner, you may not have the resources to pay for a payroll specialist. In this instance, the responsibility of ensuring payroll is done correctly falls on you.
Aside from calculating hours and making deductions for insurance or 401Ks, you’ll also need to know how do payroll taxes work.
Businesses not only have to deduct taxes from the employee’s earnings, but they are also responsible for calculating their portion. Afterward, taxes are sent to the state and the federal government.
Are you an employer perplexed about payroll taxes? Keep reading or tips on what you need to know about payroll taxes.
How Do Payroll Taxes Work for Small Businesses?
An employee and business owner have different payroll taxes to consider. There are four main tax categories. However, not all are applicable to your employees. Some are based on the state you reside in.
Businesses are required to have a Federal Identification Number or EIN for tax filing purposes.
Here are the main payroll tax definitions.
FICA
FICA stands or Federal Insurance Contributions Act. These mandatory taxes are based on a percentage of the employee’s earnings, minus deductions. The taxes fund Medicare, Social Security, and other benefits such as supplemental security income (SSI).
FUTA
FUTA is the Federal Unemployment Tax. What you need to know about payroll taxes is that it is paid by the employer and not the employee. Employees may be required to pay a state unemployment tax.
Employees that lose their job due to no fault of their own may be entitled to file from unemployment. The money comes from the unemployment tax.
SDI
State Disability Insurance is a state-level tax and is not a requirement of every state. These payroll taxes are deducted from the employee’s paycheck.
SDI is similar to unemployment taxes. It is used to provide short-term income to employees that become disabled and can’t work.
State Income Taxes
The majority of states have a state income tax. This is a payroll tax in addition to federal taxes. There are nine states that do not impose a state income tax.
If a business has employees in multiple states, they will need to know the laws for each state. This also applies to employees that earn income multiple states.
What Happens if You Do Not Withhold Taxes?
You do not want payroll tax problems. Businesses that do not collect or pay payroll taxes are subject to civil and criminal penalties. The business can also have significant monetary fines imposed.
Regardless, of the outcome, you’ll still be responsible for paying the taxes.
Payroll Taxes is a Part of Being a Business Owner
No one wants to pay taxes but it is a part of being a business owner. How do payroll taxes work is easy when you understand the process? If it is too cumbersome, consider an accounting program.
For more information check out our payroll and accounting section.
