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So you hired a payroll vendor to take care of your payroll and taxes, right? But what about your responsibility for the taxes as an employer? What does it all mean? How do you calculate payroll taxes?

Taxes come in all shapes and sizes and differ in responsibility for both employers and employees. Once you hire someone, you’re now responsible for matching what that employee is paying.

We’ll break down the basics for you here.

What’s a payroll tax?

If your business has employees, you’re required to withhold payroll taxes from employees’ paychecks and pay any applicable federal, state and local taxes.

Federal taxes include the following:

  • Federal Insurance Contributions Act (FICA) – Half is paid by the employer, half is paid by the employee.
  • Federal Unemployment Tax Act (FUTA) – Paid for totally by the employer.
  • Federal income tax – Paid for by the employee.

On the state level, there’s State Unemployment taxes to be aware of that are mostly the responsibility of the employer. For some states though, like Pennsylvania and Ohio, SUI taxes are the responsibility of both the employer and employee.

Always check your local regulations as there are certain payroll taxes that get as specific as which municipality or township you operate in.

Taxable workers.

Before you even get to all these calculations, you have to determine the amount of taxable workers you have on your staff. That might seem like an obvious step, but it could be easy to overlook the tax responsibilities of an employees versus an independent contractor. Employees are subject to payroll taxes while independent contractors are responsible for paying their own taxes.

The IRS has a comprehensive guide for determining the difference, but here’s a quick set of questions to ask that can help.

  1. Does the company control or have the right to control what the worker does and how he or she does the job?
  2. Are the business aspects of the job controlled by the payer? (Ex. Are expenses reimbursed?)
  3. Are there written contracts or employee type benefits? (Ex. Vacation pay or insurance). Will the relationship continue and is the work a key aspect of the business?

Current rates.

In order to calculate your payroll tax, you must know the current rates. Keep in mind that whatever the employee puts on their Form W-4 would impact how much or how little they would be taxed.

Here are some federal numbers:

The Social Security tax rate for employees is 6.2 percent of the employee’s gross pay. (So as the employer, you match what the employee pays meaning your rate would be 12.4 percent).

For state unemployment, it varies widely based off factors of what type of business you are and which state you’re in of course.

The Social Security taxable wage base is $127,200.

The Medicare tax rate is 1.45 percent of the employee’s gross pay.

The FUTA tax rate is 6.0 percent of the first $7,000 you pay in wages to an employee.

The Self-Employment Contributions Act (SECA) tax rate is 15.3 percent. This means if you’re self-employed, you pay both the rates for yourself as the employer and yourself as the employee.

For state-specific numbers, check the Quick Wage & Tax Guide. This resource is updated every year.

Taxable wages.

At its most basic level, taxable wages are compensation for services performed. This would include salary, bonuses or gifts. Other forms of compensation that you might provide such as business expense reimbursement do not qualify as taxable wages. In order for the expenses to be nontaxable, they must be necessary, reasonable and business-related, and employees have to verify them through receipts or expense reports.

Withholding – responsibilities for both the employee and employer.

Upon hiring, each employee is required to fill out a Form W-4. Federal, state and local taxes (when applicable) are calculated based off that form. Your employee will provide their filing status and number of allowances they are qualified to take and that is used to calculate the amount held from gross pay.

Federal withholding on payroll taxes is paid using Forms 940 and 941.

Both- FICA

FICA is the federal law that requires employers to withhold Social Security and Medicare taxes from employees’ wages. Also, it requires the employer and employee to each pay half of the FICA tax.

FICA taxes are unaffected by the number of withholding exemptions claimed by the employee. The calculation goes like this: You multiply an employee’s gross wage payment by the applicable tax rate to determine how much to withhold and how much you have to pay as an employer.

Employee – driven deductions

Do you offer benefits that are funded through payroll deductions? Some are made on a pre-tax basis, thus reducing the amount of pay that’s subject to tax.

Examples of these types of deductions that need to be factored in are:

  • Contributions to certain types of retirement plans.
  • If you’re a nonprofit, your employees may participate in a 403(b) plan.
  • A health flexible spending account (FSA) or a health savings account (HSA).

Employer – FUTA

Now FUTA comes into pay. This tax is paid by the employer. You are required to pay this tax if either of these apply:

  • You pay wages totaling in at least $1,500 per quarter.
  • You have at least one employee on any day for 20 weeks in a calendar year (regardless of if these weeks are consecutive).


This breakdown only scratches the surface of how to calculate payroll taxes. As you can tell, it can be very complicated.

Check out the original post here.