When you start hiring employees, you will have expenses over and above the salary that you pay them. Social security and medicare make up the taxes known as Federal Insurance Contributions Act (or FICA). FICA taxes, along with unemployment insurance taxes (known as FUTA and SUTA), add up to around 10% of their wages or higher. Additionally, most states will require that you buy workers compensation insurance.
In this guide, we’ll cover all these hidden expenses of hiring employees, including the current 2016 tax rates.
If you have employees, you need a way to pay FICA taxes, unemployment insurance taxes, and workers compensation insurance that won’t cause headaches. Gusto is packed with features like automatic tax filings and digital paystubs to make payroll and taxes a breeze. Try it free for a month.
2016 Employer Tax Rates
Cost In Dollars or Percentage (%) of Wages
Maximum Dollar ($) Amount Taxed Per Employee
Total Cost For A Worker Earning 30,000 per Year
Social Security Tax
$118,500 (in 2016)
State Unemployment Insurance (New Employers*)
Federal Unemployment Insurance
Most States 0.6%
CA, OH 2.1%
Worker Compensation Insurance
Average $1.50 for every $100 of payroll, but varies widely
Free / $63 Per Year
Total: Approx. $3,000 – $3,500 for an employee earning $30,000 per year, depending on your state and SUI tax rate.
*Note: State Unemployment Insurance (SUI) Rates vary from business to business. You should have a rate assigned to you each year by your state’s Department of Labor. If you’re unsure of your rate, try logging into your state tax website to check.
Also, bear in mind that healthcare will be an additional cost to businesses with over 50 employees. If you have fewer than 50 full time equivalent employees, you are not required to provide health insurance to employees. To learn more about health insurance and Obamacare requirements, check out our full guide here.
Why are posters an expense related hiring employees?
In many lunchrooms or employee only areas, you will see posters detailing employee rights like the minimum wage. Both the federal and state governments require that certain information be posted in a location visible to all employees. The employment posters required by the Federal Government are available here and can be ordered for free.
Unfortunately, states aren’t always as organized as the federal government and may only provide a list of requirements. For around $63 per year, The Labor Law Center will provide you a poster to comply with the requirements for both state and federal labor laws. Additionally, if the requirements change, they will automatically send you a new poster.
FICA Taxes (Social Security & Medicare)
The bulk of employer taxes are Social Security and Medicare. Together, these two taxes make up FICA, which stands for the Federal Insurance Contributions Act:
- Employers must contribute 6.2% of salary / wages for social security on the first $118,500 paid to an employee (for 2016)
- Employers must contribute 1.45% of salary / wages for medicare without limit to the employee’s salary / wages (for 2016)
For more on these taxes, including when and how to pay, check out our full guide to FICA taxes here.
Unemployment Insurance (SUTA & FUTA)
Employers are required to pay unemployment insurance taxes to both their state and federal governments. These are known as SUTA and FUTA, respectively.
State unemployment tax rates (also known as SUTA or SUI) are set individually for each business. Your rate should be mailed or delivered electronically to you each year.
Federal unemployment tax (FUTA), on the other hand, is a flat 6.0%. In reality, however, the rate is typically much smaller:
- If your company is up to date on your state unemployment taxes, your company receives a credit, reducing the rate to only 0.6%. (If your state owes the federal government money, you will receive less of a credit. Companies with employees in California and Ohio, for example, will pay a 2.1% rate in 2016. Those in Connecticut will pay 2.7%. See more info here.)
- The tax applies only to the first $7,000 of income per employee. Assuming that your company is paying 0.6% and every employee makes at least $7,000 per year this tax only comes to $42 per year per employee.
For more information on FUTA taxes and Form 940 check out our full guide here.
Workers Compensation Insurance
Worker’s compensation insurance covers claims by employees against a company for job related injuries or illness. With the exception of Texas, every state will require that you buy worker’s compensation insurance. In most states, worker’s compensation insurance is sold and underwritten by private companies, although some states require you to buy it from specific state-managed carriers.
Check out our full guide to worker’s comp insurance for state-specific requirements, pricing estimates and more.
Another benefit to using Gusto payroll software is that you can purchase a worker’s comp policy directly through the program. As with payroll taxes, Gusto will make deductions and send payments automatically on your behalf. Besides your premiums, there’s no additional cost to workers comp insurance when you purchase through Gusto.
The Bottom Line
In summary, these are the payroll taxes and hidden costs you need to look out for:
- Social Security
- State Unemployment Insurance (SUTA)
- Federal Unemployment Insurance (FUTA)
- Workers Comp Insurance
While rates for FICA Taxes (Social Security and Medicare) tend to be standard, the rest will vary depending on your state and specific business. Additionally, each of these taxes require payments to be sent at different times, with different forms and to different agencies.
Sound complicated? This is why we highly recommend business check out Gusto payroll software. In addition to administering payroll with direct deposit, they’ll handle all tax paperwork and payments, including workers comp. This is not only a huge time saver for small businesses, but a load-off when it comes to protecting yourself from tax penalties. Try it free for a month.