Small business owners who pay employees must deal with an oftentimes challenging obligation: payroll taxes. If you do not utilize a full-service payroll and tax software for your small business, it can be difficult to learn about small business payroll taxes on the local, state, and federal level, or even what to expect in terms of the process.
Understanding how to estimate payroll taxes for small businesses is a crucial element of your entrepreneurial endeavor. In this article, we’ll go over what exactly your employment tax obligations are so you can better prepare.
You can also view our article on payroll tax relief for small business to learn how to reduce your tax rates.
Small business payroll tax withholding
Understanding how to set up payroll taxes for small business includes knowing what you need to withhold from each paycheck. The IRS requires you to withhold payroll taxes from every employee’s earned wages when running payroll. You also need to pay federal, state, and local taxes your business is subject to.
The taxes you need to withhold from your team’s paychecks each pay period usually include:
- FICA: The Federal Insurance Contributions Act (FICA) requires you to withhold 6.2% of the employee’s taxable wages for Social Security and 1.45% for Medicare tax.
- Federal income tax: Your employee’s Form W-4 will help you determine how much you need to withhold in federal income tax. You can also use the wage bracket method if your employee makes less than $100,000 a year. To find your employee’s wage range, use the IRS income tax withholding tables.
Your state may also require you to withhold additional taxes, like state income tax, so be sure to check your state’s department of revenue site to learn more about what you need to withhold.
Federal employer taxes
Not only do you withhold payroll taxes for FICA from your employees, but you are also responsible for paying the same taxes as a business. You’ll need to pay 6.2% for Social Security taxes, and 1.45% for Medicare taxes.
Additionally, tax filing includes your contribution to FUTA payroll taxes. This money goes toward federal unemployment insurance and will cost you 6% of the first $7,000 each employee earns. After the initial $7,000, you don’t need to pay any additional FUTA taxes.
State employer taxes
Regardless of which state you operate in, you need to pay State Unemployment Insurance taxes as well. The rates vary—you’ll be notified of how much you owe when you register as an employer in your state.
Calculating payroll taxes
The first step in calculating your small business payroll taxes is to determine how many taxable workers you employ. There are two types of team members you might have: taxable employed individuals and independent contractors.
If your team member is an employee, they are subject to payroll taxes. If they are an independent contractor, they take care of tax filing on their own.
Typically, a worker is an employee if you control the way they work. But it can get a little complicated in certain situations to determine the status of your worker. Take a look at our article on what you need to know about independent contractor laws to learn more.
An employee’s taxable wages consist of the compensation they earned for services performed. These can include hourly pay, salary, bonuses, or gifts. If you reimburse your employee for necessary, business-related expenses like travel, this money is not taxable. Your employee needs to verify these expenses with receipts or expense reports for them to be considered nontaxable.
Once employee wages are determined you can then calculate how much you need to withhold in federal, state, and local taxes based on the percentages provided above and any additional state and local taxes you may be subject to.
You need to submit Form 941, Employer’s Quarterly Federal Tax Return, every quarter by the last day of the month after the end of the quarter using this portal. The IRS uses this form to see how much money you withheld from each employee, and how much you paid in taxes for the quarter.
If you paid at least $1,500 in employee wages in the year or employed someone for at least 20 weeks, you’ll need to file Form 940, Employers’ Annual FUTA Tax Return. Let’s say you paid your FUTA taxes on time—on the last day of the month at the end of each quarter. Then, your Form 940 is due February 10 annually. If not, you’ll have to submit it by January 31.
Form W-2 is used to report annual wages paid, deductions, and withholdings for each employee and is required each year. Send a copy to every team member, and then submit them to the Social Security Agency as well as your local tax department by January 31.
Need some help?
Small business payroll taxes can be complicated, especially if you don’t have a human resources team to help you figure it out. Making sure you’re running payroll correctly and submitting the right amount in tax deposits is very important, however, because failing to do so can lead to serious fines and penalties.
Luckily Homebase payroll can help you with your tax payments and ensure compliance. When you run payroll, Homebase calculates taxes and paychecks, sends direct deposits to your team, and automatically pays and files your payroll taxes. Plus, your employees get on-demand access to their pay stubs, W-2s, and 1099s in the Homebase app.