FICA Taxes, Unemployment Insurance, & Workers Comp For Owners

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fica taxes hidden expensesIn our last article we wrapped up our series on how to start a successful business, with a look at how to setup your new office.  In today’s article we begin a new series on how to hire and manage staff, with a look at the hidden expenses of hiring employees including FICA Taxes, unemployment insurance, and workers compensation insurance.  So let’s get started!

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“Hidden” Expenses Are Generally 10% Or More Of Wages

When you start hiring employees, you will have expenses over and above the salary that you pay them. You will also need to pay taxes for their social security, medicare, and unemployment insurance.

These expenses will add up to around 10% of their wages, and could even be higher if you have a large number of hourly, low-skill workers. Additionally, most states will require that you buy workers compensation insurance which will tend to add another percent or two to your costs.

If your business starts employing more than 50 full-time employees, your minimum expenses will include providing your employees health coverage, which can add thousands of dollars a year per employee in expenses.

Need payroll software to help calculate employee withholdings and taxes? We recommend ZenPayroll. For the full the full review of payroll services, read this.

Table Of “Hidden Costs”  Of Hiring Employees

Expense

Cost In Dollars or Percentage (%) of Wages

Maximum Dollar ($) Amount Taxed Per Employee

Percentage (%) Of Salary For A Worker Earning $28,000 per Year

Posters

Free / $63 Per Year

——————-

——————-

Social Security Tax

6.2%

$113,700 (in 2013)

6.2%

Medicare Tax

1.45%

Unlimited

1.45%

State Unemployment Insurance

CA 3.4%

NY 3.4%

TX 2.7%

$7,000

$8,500

$9,000

0.85%

1.03%

0.88%

Federal Unemployment Insurance

Most States 0.6%

CA, NY 1.5%

$7,000

$7,000

0.15%

0.38%

Worker Compensation Insurance

Typically 1% to 2% for office workers

——————–

Typically 1% to 2% for office workers

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.

Social Security & Medicare Tax (also known as FICA)

Don’t employees pay these taxes? If you have ever received a paycheck from an employer, you know that as an employee these taxes are deducted from your paycheck. Employers are responsible for calculating and collecting employee payments, as well as making their own contributions.

  • Employers must contribute 6.2% of salary / wages for social security on the first $113,700 paid to an employee (for 2013)

  • Employers must contribute 1.45% of salary / wages for medicare without limit to the employees salary / wages (for 2013)

What about the extra medicare 0.9% tax on high wage earners to pay for “Obamacare”?

“There is no employer match on the 0.9 percent,” says Chris Hesse, a tax partner with CliftonLarsonAllen. – Plan For High Income Surtaxes In 2013

When do you pay FICA taxes?

Depending on the size of your payroll, you will need to calculate and make FICA payments to the IRS once per month, or semi-weekly. Payments must be made electronically through the IRS proprietary system called (EFTPS). Jean Murray of About.com provides helpful information on paying the IRS in her article, “When do I make payroll tax deposits?”

Unemployment Insurance

While unemployment benefits are set and administered by individual states, the federal government is also involved. When the states use up funds that are set-aside for unemployment benefits, the federal government steps in and loans the state money.

This is one of the reasons that employers pay unemployment insurance taxes to both the federal government and the states in which they have employees. Unemployment taxes on a federal level are 100% paid for by the employer. With a few minor exceptions, this is also true on the state level.

While the official federal unemployment tax (FUTA) rate is 6.0%, the reality is the tax is a small fraction of this amount for the following reasons:

  • 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 New York for example, will pay a 1.5% rate in 2013. See  States with penalties.)

  • 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.

The majority of unemployment taxes get paid to the states.

The rates mentioned at the top of this article are the introductory rates provided to new employers for the state mentioned. Based on your industry, these rates may be moved up or down. Once your company has a history of hiring (and perhaps, letting employees go), the rate will be adjusted. A company which has low turnover can expect to pay a much lower rate than one that has high turnover.

It’s also important to note that the tax paid to the state is not limited to the first $7,000, which is the federal limit. In New Jersey for example, the tax is paid on the first $30,900 of income. However, the taxable income amount for most states is $14,000 or less. For more state specific information, go here.

The federal government requires that you pay FUTA on a quarterly basis. Most states will also require the payment of unemployment tax on a quarterly basis. However, you will be making separate payments to the state and federal governments, and filling out different paperwork for each.

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 states offer programs for companies that private insurers will not cover.

How much does worker’s compensation insurance cost?

Worker’s compensation is priced as a percentage of payroll.  The average percentage in the United States is just under 2%. However, this number can be much lower or higher, depending on the state and the type of work employees are engaged in. The base rate is by employee classification and set on a state level.

Clerical workers in California might have a rate of 1.25%, while roof installers / repairmen might have a rate of 10.0%. In other words, you might have to pay $375 per year to insure a clerical worker making $30,000 per year, and $4,000 per year for a roof installer making $40,000.

The insurance company will have base rates for each employee classification and then modify the rate to reflect the safety history of the company and the steps the company is taking to prevent workplace injuries. For more information on how rates are set, read this “Getting Workers Compensation Is A High Cost For Business” By Robert Elliot, J.D.

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Summary

1) You will need to pay FICA taxes. Unless you have employees making over $100K per year, the combined FICA Taxes (Social Security and Medicare) are 7.65% of payroll. For small companies, this tax needs to be paid monthly.

2) You will need to pay federal and state unemployment tax. At most, the federal portion of this tax will be be $105 per employee. Any decent payroll software will be able to calculate your Federal payroll tax based on your state. State unemployment insurance is more complicated and expensive. You will need to apply for state unemployment insurance and will be told your rate by the state. For the purposes of budgeting, you can expect this to add-on around 1% to your employee expenses. Generally speaking, this tax is paid quarterly.

3) You will need to get workers compensation insurance via a private insurance company in most states. While general rates by profession are set by the state, insurance companies can modify this based on the safety record of your company / industry. For office workers, this expense should be less than 2%.

That’s our article for today, if you have any questions or comments please leave them in the comments section below.  Also be sure to stay tuned for the next article in this series where we will discuss the advantages and disadvantages of hiring independent contractors vs. employees.

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Comments (4)

    • said on

      Hi Hodelia, Fit Small Business has several employees that work remotely from their homes. We pay FICA, Worker Comps and Unemployment insurance for all of them. One thing to keep in mind, is the business needs to pay these for / to the state in which the employee works, even if its different than the where the business is based. Also, when buying the worker compensation, I would let the insurance broker know about the employee’s remote status. Good Luck, Marc

  1. said on

    I work FT remotely from home in the Midwest. My employer is on the East Coast. I want to move to CA, and the employer says I would need to change status from FT (which I’ve been for 20 yrs) to contract employee. I had previously lived in CA and worked FT remotely for them then, but was with previous owners.
    Is their cost of having me work from home in CA that much more involved/expensive than having the same arrangement w me in the Midwest? Is there something else that makes CA not friendly for them? Would they be forced to carry disability and other things they don’t now? I was considering offering a lower salary in order make the move as a FT employee more attractive. Any thoughts?

    • said on

      Hi Stephen,

      Thanks for the comment. Unfortunately many states make it difficult for companies that are not located in the state to employ people there. While I am not familiar with CA specifically when we hired a FT employee in Washington State we had to register to do business in the state and file a separate state tax return there as well. While it is not that much more expensive for us to employee someone there, it was a big hassle. So I suspect that your employer just doesn’t want to deal with the extra hassle involved if they employ you full time.

      Is there a specific reason that you want to be a full time employee vs. contractor? There are tax advantages to being a contractor as you can deduct things like your home office as a business expense.

      Hope that helps.

      Best Regards,
      Dave

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