Payroll tax is a critical part of business, but it can be unclear. This blog post is designed to break down payroll tax for small businesses in an understandable way, complete with examples and calculators.
If you’re in California, this will be especially useful to ensure you stay compliant with state tax laws.
So why should you read this? Because payroll tax can be expensive if not done correctly, and as a small business owner, every penny counts.
What is Payroll Tax?
As an employee, you are responsible for paying payroll taxes from each paycheck. These include Social Security and Medicare taxes, federal & state income tax, unemployment insurance tax, and FICA (Federal Insurance Contributions Act) – all mandated by applicable state & federal laws with severe penalties should employers fail to comply.
Employers must accurately calculate & deduct these payroll taxes before remitting them in full compliance with the respective governing authorities, failing which could lead to dire repercussions.
For example, in California, employers must pay state payroll taxes such as the California Employment Training Tax (ETT) and the Unemployment Insurance (UI) tax. Employers must also withhold income tax from their employee’s wages and remit them to California.
What are the Different types of Payroll Taxes?
Payroll taxes are taxes imposed on an employee’s wages or compensation. Certain payroll taxes include social security and medicare tax, federal and state income tax, unemployment tax, and FICA tax.
The employer is responsible for withholding these taxes from each employee’s paycheck and matching amounts for Social Security and Medicare. Employers are also responsible for calculating, deducting, reporting, and remitting the required payroll taxes to the appropriate taxing entities.
Employers must comply with all applicable state and federal laws regarding payroll taxes to avoid penalties or other repercussions.
Federal Income Tax
The FIT (Federal Income Tax) is withheld from employee wages and remitted to the IRS every quarter.
2020 Federal Income Tax Brackets
| Tax rate | Single Filers | Married Filing Jointly or Qualifying Widow(er) | Married Filing Separately | Head of Household |
| 10% | $0 – $9,875 | $0 – $19,750 | $0 to $9,875 | $0 to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $9,876 to $40,125 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $40,126 to $85,525 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,526 to $163,300 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $311,025 | $207,351 to $518,400 |
| 37% | $518,401 or more | $622,051 or more | $311,026 or more | $518,401 or more |
2021 Federal Income Tax Brackets
| Tax rate | Single Filers | Married Filing Jointly or Qualifying Widow(er) | Married Filing Separately | Head of Household |
| 10% | $0 to $9,950 | $0 to $19,900 | $0 to $9,950 | $0 to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $9,951 to $40,525 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $40,526 to $86,375 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,376 to $164,925 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,926 to $209,425 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,426 to $314,150 | $209,401 to $523,600 |
| 37% | $523,601 or more | $628,301 or more | $314,151 or more | $523,601 or more |
Social Security Tax
Both employers and employees are responsible for paying this payroll tax.
The employer must withhold 6.2% of each employee’s taxable wages until they reach total earnings of $147,000 for the year. The employer must also match this payroll tax one-for-one.
Medicare Tax
Again, both employers and employees are required to pay Medicare payroll tax, which is 1.45% of each employee’s taxable wages up until they have reached total earnings of $200,000 for the year.
For wages above $200,000, employees need to pay an additional 0.9%, while the employer’s payroll tax rate remains the same.
FUTA Unemployment Tax
This payroll tax is solely the responsibility of the employer, who must pay 6% of the first $7,000 of taxable income for each employee.
If state unemployment taxes are paid, employers may be eligible for a credit reducing this payroll tax rate to 0.6%.
Subtract any Post-Tax Deductions
Your employees could be responsible for post-tax deductions such as court-ordered wage garnishments, child support, etc. If so, you will need to withhold these deductions from their paychecks.
State Unemployment Insurance payroll taxes
Like FUTA, payroll taxes are solely the responsibility of the employer.
Each state sets its payroll tax rate, and staying current on these rules and regulations in your area is essential.
State unemployment insurance (SUI) is a tax-funded program by employers to give short-term benefits to workers who have lost their job.
This tax is required by state and federal law. Unemployed workers receive these benefits on the condition that they’re looking for a new job.
The benefits are meant to subsidize the unemployed worker’s basic needs until they find a new job.
Employers are responsible for state unemployment insurance tax for their own employees.
The amount of SUI, the company, pays depends on the SUI rates they’re eligible for.
Almost all companies are required by law to pay this tax, but there are some rare exemptions.
California Payroll Tax: Special Considerations
California payroll taxes are based on a percentage of wages, and the amount varies depending on factors.
They include the employer and employee’s payroll tax rate. The California Department of Tax and Fee Administration website shows employer and employee payroll tax rates.
To calculate California payroll taxes, employers must consider additional taxes, such as federal income tax withholding.
Employers may also need to pay additional payroll taxes if they offer their employees certain benefits or bonuses.
Payroll Tax Rate – Every Small Business Must Know
Employers must pay payroll taxes at a specific payroll tax rate. This payroll tax rate varies from one state to another. It may also vary depending on the size of the business.
The payroll tax rate for businesses with fewer than 25 employees is generally lower than for larger companies.
The employer’s payroll tax rate can be found online or by calling their local payroll office.
The employer should also consult a payroll accountant or other payroll professional to make sure they are getting accurate payroll tax advice.
Currently, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)). If it’s split evenly between employers and employees, that would be 7.65% each per payroll cycle.
Employer Payroll Tax Calculator
If you’re a small business owner in California, using an employer payroll tax calculator can be helpful.
It helps you determine how much you should withhold from your employee’s wages for payroll taxes.
With an employer payroll tax calculator, you can easily enter your payroll information and quickly determine the payroll taxes you must pay.
How To Calculate Payroll Taxes?
By following the steps below, small business owners in California can easily calculate payroll taxes:
Gather payroll information
This includes the number of employees’ wages, and applicable payroll tax rates (according to Form W-4 Employee’s Withholding Certificate).
Calculate payroll tax withholding
Once you have the payroll information, you can use an employer payroll tax calculator to calculate payroll taxes.
Subtract post-tax deductions
Certain post-tax deductions, such as court-ordered wage garnishments or child support, must be withheld from the employee’s paychecks.
Pay payroll taxes
You must pay payroll taxes on time to avoid penalties and fines.
Wrapping Up Payroll Tax for Small Businesses
As a small business owner, staying up-to-date on your area’s payroll tax regulations is vital to ensure compliance and avoid costly penalties and fines.
The best way to do this is by keeping up with payroll tax news and consulting payroll professionals.
By understanding payroll taxes, you can ensure your small business remains profitable while still paying your employees their due wages.
With the right resources and knowledge, payroll taxes don’t have to be a burden – they can help keep your business running smoothly.
Stay up-to-date on payroll tax news and regulations to ensure compliance and avoid costly penalties and fines.
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