If you're making money, chances are you'll have to pay taxes on it. In fact, Uncle Sam takes a decent-sized chunk of your paycheck before it even hits your bank account. Before you sign a lease or nail down your budget, you’ll need to figure out your "take-home pay," or the amount of your hard-earned money that will actually end up in your pocket. Show
In this article, we’ll answer two questions: How much can you expect to pay in taxes, and just what is that tax money used for? How Much Money Gets Taken Out of Your Paycheck?Let’s say you got a new job that pays $20/hour. That works out to $800 per week, $3,200 per month, and $41,600 per year--pretax. How much of that can you expect to take home after taxes? Where Does All That Money Go?Federal income tax is the government’s biggest source of revenue. It is used to pay the country’s ongoing expenses, such as national defense, infrastructure needs, social assistance programs, and paying interest on the national debt. Many people are surprised to learn that all of the income you make is not taxed at one rate. Let’s say you are the single filer in the example above, earning $41,600 per year. Your income falls into the 22% tax bracket. But, if you paid a flat 22% tax rate, you'd owe $9,152. Yikes. What gives? Federal income taxes are paid in tiers. For a single filer, the first $9,875 you earn is taxed at 10%. The next $30,249 you earn--the amount from $9,876 to $40,125--is taxed at 15%. Only the very last $1,475 you earned would be taxed at the 22% rate. This IRS Tax Table can help you figure out how much federal income tax you owe. What Is FICA?Social Security and Medicare withholding are also known as FICA. You pay 6.2% of your salary up to the Social Security wage cap, which is $142,800 for 2021, and 1.45% in taxes for Medicare (note that there is no wage cap for Medicare tax). When you work for a corporation, these taxes are matched by your employer, for a total tax paid of 12.4% of salary up to the Social Security wage cap and 2.9% Medicare tax. When you're self-employed, you pay both halves yourself. Also, if your yearly salary is $200,000 or more, you will have to pay an additional 0.9% in Medicare tax. Social Security is a U.S. government program that provides federal aid to Americans. It includes many federal aid programs: unemployment assistance, disability assistance, Medicaid, and so on. One of the largest Social Security programs is retirement benefits. For many Americans, retirement benefits are a crucial piece of their retirement income. Eligibility for retirement assistance through Social Security involves accumulating 40 Social Security Credits. Because four credits can be earned in most every year, Americans will need to work for at least 10 years to be eligible. Social Security benefits include survivor benefits. If the immediate beneficiary passes away, eligible family members may receive the benefits in their place. In this guide, we’ll show you how to calculate employer payroll taxes (the taxes you, as the employer, will pay) as well as how much employee tax to remit to the government. If you don’t have employeesIf you run a small business without any employees, you’ll still have to remit payroll taxes—for yourself. This is called self-employment tax and is effectively Medicare plus Social Security for yourself (which amounts to 15.3% of your net business income). Learn more in our guide to self-employment taxes. Payroll taxes when you do have employees gets a little trickier. Summary of payroll taxesSince your business and your employee are both taxpayers, there are two types of payroll taxes: ones that come out of your own pocket and ones that you collect from employee paychecks and remit to the federal government. Payroll taxes that come out of your pocket:
We’ll cover both of these in more detail later on. Payroll taxes that you collect and remit:
We’ll cover each of these in detail, beginning with federal income tax withholding. What is the percentage of federal income tax withheld?As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities. To calculate how much of your employee’s federal income tax to withhold, you’ll need a copy of their Form W-4, as well as your employee’s gross pay. Your next step is to determine the method you want to use to calculate withholding. Most employers have two options: the Wage Bracket Method or the Percentage Method. While not exactly simple, the wage bracket method is the more straightforward approach to calculating payroll tax. How to calculate federal income tax withholding using the Wage Bracket MethodWhen using the Wage Bracket Method, there are two possible calculations: one for employees with a Form W-4 from 2019 or earlier, the other for employees with a Form W-4 from 2020 or later. Employees with a Form W-4 from 2019 or earlier:
Employees with a Form W-4 from 2020 or later:
The Percentage Method is much more complicated—not recommended if you’re doing this alone. If you want to learn more about the Percentage Method, you can read all about it and the wage bracket methods in IRS Publication 15-T. Once you’ve figured out how much income tax to withhold from your employees’ paychecks, your next step is to figure out how much FICA to withhold (more on that below), and how much you’ll be required to pay on their behalf. Calculating FICAFICA stands for “Federal Insurance Contributions Act.” It’s a mandatory payroll tax deduction used to pay for programs like Social Security (disability insurance, old age, survivors) and Medicare (covering health insurance for folks over 65). When it comes to funding FICA, your employee pays 50% from their paycheck while you, the employer, pay 50% out of your own revenue. As the employer, you are required to withhold and pay the amount your employee is responsible for from their paycheck, and remit those funds on their behalf. Current FICA tax ratesThe current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Combined, the FICA tax rate is 15.3% of the employee’s wages. Do any of your employees make over $147,700? If so, the rules are a little different, and they may owe additional Medicare tax. Read more at the IRS.gov website. How to calculate FICA payroll taxSocial Security withholdingTo calculate Social Security withholding, multiply your employee’s gross pay for the current pay period by the current Social Security tax rate (6.2%). This is the amount you will deduct from your employee’s paycheck and remit along with your payroll taxes. Example Social Security withholding calculation: $5,000 (employee’s gross pay for the current pay period) x .062 (current Social Security tax rate) = $310 (Social Security tax to be deducted from employee’s paycheck) Further reading: Social Security Tax: What Employers Need to Know Medicare withholdingTo calculate Medicare withholding, multiply your employee’s gross pay by the current Medicare tax rate (1.45%). Example Medicare withholding calculation: $5,000 (employee’s gross pay for the current pay period) x .0145 (current Medicare tax rate) = $72.50 (Medicare tax to be deducted from employee’s paycheck Employer matchingAs an employer, you are responsible for matching what your employees pay in FICA taxes. In this case, you would also remit $310 for Social Security tax and $72.50 for Medicare tax. Calculating FUTAFUTA stands for Federal Unemployment Tax Act. It’s an employer-paid payroll tax that pays for state unemployment agencies. The FUTA tax rate is 6% on the first $7,000 of wages paid to employees in a calendar year. However, employers actually pay 0.6% since each state receives a credit to cover the remaining 5.4% of FUTA payments. Unfortunately, some states are currently ineligible for the full credit. You can learn more in our guide to FUTA. FICA vs. FUTAWhile FICA is a payroll tax that contributes toward Social Security and Medicare, FUTA (Federal Unemployment Tax Act) is an employer-paid payroll tax that funds state workforce agencies and unemployment insurance. They also require different tax forms. You’ll report FUTA on Form 940 - Employer’s Annual Federal Unemployment Tax Return at the end of the financial year. The due date is January 31. You’ll report FICA quarterly using Form 941 - Employer’s Quarterly Federal Tax Return. The due date is the last day of the month following the quarter. For example, if your quarter ends on March 31, the form is due on April 30. How to make payroll tax paymentsCalculating your payroll taxes is the hard part—actually making the payments is easy. You just enroll in the Electronic Federal Tax Payment System (EFTPS), then make your payment online. It’s the only way to make a payroll tax payment (mailing checks isn’t allowed). You can access EFTPS here. State and local payroll taxEmployers are also responsible for paying state and local (city, county, etc.) payroll tax on behalf of employees. As with federal payroll tax, part of this tax is employer-paid, and part is employee-paid. Keep in mind that “employee-paid” just means that you, the employer, withhold a certain amount from your employee’s paycheck and then remit it as part of your payroll taxes. In addition to state payroll tax (State Unemployment Tax, or SUTA), employers are also responsible for remitting state income tax on behalf of their employees. State and local payroll taxes are governed at the state and local levels, and payroll tax rates and rules vary by jurisdiction. To find out more about payroll tax in your state and local area, check out the Federation of Tax Administrators’ list of each state’s taxing authority. You can outsource payroll taxPayroll tax is complex. The calculations are nitpicky, and the penalties are steep. Even paying payroll taxes just a day late comes with a 2% penalty on the amount due, with that penalty rising as high as 15% for past due payroll taxes. If you’d rather not deal with the stress, we highly recommend outsourcing your payroll to a company like Gusto. They’ll take the headache out of everything from paying your employees the right amount at the right time to handling pesky withholding calculations and payroll taxes. Whenever you need to check your records, you’ll have automatically generated pay stubs to review with all the essential information. When it’s time to record payroll costs on your books, Bench can take care of that for you. Learn more about how we save small business owners hours of admin every month. |