Employer payroll taxes are calculated by combining 50 percent of Social Security taxes (12.9 percent of employee wages), 50 percent of Medicare taxes (2.9 percent), and 100 percent of federal and state unemployment taxes. While you can make these calculations yourself, it’s much faster and easier to use a payroll software to complete these calculations for you.
If you use a payroll software like Gusto, you can hire employees in any state and the software will calculate paychecks, handle payroll tax payments and complete the payroll tax forms in each state for you! This could save you thousands of dollars in interest and penalties that you could pay for a single miscalculation when you try and do it on your own. Get started with Gusto today by visiting their site and starting your free trial.
How Employer Payroll Taxes Work
An employer is responsible for collecting and remitting withholding taxes on behalf of its employees to the IRS. Employers are required to report income and taxes withheld from their employees on IRS Form 941 each quarter. They must also deposit the taxes by the respective due date to avoid interest and penalties. Employers are also required to file and pay FUTA taxes on IRS Form 940, which is filed annually.
If employers fail to remit payroll tax payments, it could have the following impact:
- Employer will be subject to criminal and civil sanctions
- Employees may not qualify for Social Security or Medicare benefits
- Employees may not qualify for unemployment benefits
How to Calculate Employer Payroll Taxes in 3 Steps
There are a number of factors that go into calculating the employer portion of payroll taxes, including the base salary or wage of each employee, Social Security and Medicare taxes, and unemployment taxes. We will discuss each of these in more detail.
Here are the three steps to calculate employer payroll taxes:
1. Base Salary/Wage of Each Employee
The one figure most small business owners have a pretty good idea about is how much they want to pay an employee and whether or not they will be salary or hourly. In general, salary employees tend to be exempt employees, which means that they do not receive overtime pay. Hourly employees typically are eligible to receive overtime pay.
Since the calculations for the employer portion of payroll taxes are based on the employee’s salary, the more money an employee makes, the higher the payroll taxes are for both you and the employee.
2. Employer Portion Social Security & Medicare Taxes (FICA)
Social Security and Medicare taxes, also known as FICA taxes, are the only taxes that are shared by the employee and the employer. Each employer is responsible for just 50 percent of the 12.9 percent Social Security tax and 50 percent of the total Medicare tax, which is 2.9 percent. Let’s take a look at an example.
Social Security & Medicare Tax Example
For an employee who earns a salary of $30,000, an employer’s Social Security and Medicare tax liability would be as follows:
Social Security $30,000 X 0.062 = $1,860
Medicare $30,000 X 0.0145 = $435
Total FICA Taxes Due $2,295
For an employee that you pay a salary of $30,000 annually, you will pay an estimated $2,295 in FICA taxes. Since the employee is also responsible for 50 percent of the FICA tax rate, you are also responsible for deducting $2,295 in FICA taxes from the employee’s payroll check and remitting payment by the due date. As discussed, there are serious repercussions if you do not withhold these taxes from employee paychecks.
FICA taxes are reported quarterly on IRS Form 941. To gain a better understanding of how to complete and file this form, check out our Form 941 tax guide.
3. Unemployment Taxes for Employers
As an employer, you are required to pay unemployment taxes at the federal and state level. While the federal tax is the same for 48 out of the 50 states, the state tax varies for each employer.
Federal Unemployment Tax (FUTA)
Federal Unemployment Tax (FUTA) is a flat 6 percent. However, if you have paid state unemployment tax (SUTA), then the rate paid to federal is reduced to 0.6 percent (giving you a credit of 5.4 percent). However, there is an exception to this rule for employers located in California and the Virgin Islands.
Both the state of California and the Virgin Islands have outstanding loans with the federal government. As a result, employers in California and Puerto Rico must pay 2.1 percent in FUTA tax as opposed to the 0.6 percent paid by every other state, essentially reducing your credit from 5.4 percent to 3.9 percent.
FUTA tax is only assessed on the first $7,000 of an employee’s salary. Here is what the calculation looks like:
California and Puerto Rico Employers: $7,000 X 0.021 = $147 per employee
Remaining 49 States: $7,000 X 0.006 = $42 per employee
Employers located in California and Puerto Rico will pay $147 per employee for FUTA taxes, and employers in the remaining 49 states will pay $42 per employee for FUTA taxes. FUTA tax is paid 100 percent by the employer, and it is reported on an annual basis on IRS Form 940. For more details, check out our Form 940 tax guide.
State Unemployment Tax (SUTA)
Unfortunately, state unemployment tax rates are not as straightforward as federal unemployment tax. SUTA rates are set by each state and are specific to each employer. It is based on the number of employees you have fired and how many of those employees have filed unemployment claims.
In November/December of each year, you will receive your SUTA rate that will be effective January 1 of the following year. Typical SUTA rates run between 2.7 percent and 3.4 percent, but could be higher for brand new employers. SUTA tax is paid 100 percent by the employer and the due dates for payment and reporting vary with each state. You can look up your SUTA rates on our SUTA Tax Rates by State Map.
Other Employer Payroll Costs to Consider
In addition to the employer portion of payroll taxes, there are some additional costs that you need to also include when calculating your total payroll costs: disability insurance, health benefits (if applicable), paid time off, workers compensation and 401(k), to name a few.
Below are four additional items to consider when calculating your employer payroll costs:
Short-Term Disability Insurance
Disability insurance will pay an employee a percentage of their income if they become injured or ill to the point where they can no longer work. Unlike workers compensation insurance, the illness or injury takes place outside of the workplace. Most states don’t require that you provide disability insurance to your employees, but there are a few exceptions.
If you are an employer in one of the following states, you are required to provide short-term disability insurance to your employees. On average, state disability insurance rates run between 1 percent and 3 percent of annual gross income. For example, disability insurance for an employee who makes $30,000 annually will run between $300 and $900 a year.
- New Jersey
- New York
- Puerto Rico
- Rhode Island
If you have more than 50 full-time employees, you are required to provide health insurance to your employees. The average health insurance cost is approximately $600 per month for an individual employee and $1,500 per month for a family. This would mean an additional $7,200 per year for an individual and a whopping $18,000 per year for a family on top of their salary/wage! Be sure to check out our SMB Health Insurance guide for more information to learn how to select the right plan for your employees.
Paid Time Off
Paid time off generally includes sick time, vacation time, national holidays and bereavement. Employers are only required to offer paid sick time off. However, in order to recruit good talent and promote a work/life balance, most employers will offer on average 10 paid vacation days per year. Let’s use our salaried employee who makes $30,000 per year to calculate the cost of vacation/sick pay as follows:
|Vacation Pay Calculation||$30,000/52(weeks)||=||$1,153 pay per week|
|$1,153/5||=||$231 pay per day|
|$231 X 10 days vacation||=||$2,310 total vacation pay per year|
In addition to the $2,310, you would need to add in FICA, FUTA and SUTA taxes.
Check out our how to create a paid time off policy guide to learn how to implement a paid time off program for your employees.
Retirement Account Contributions
Another benefit that many employers offer (but are not required to) is a 401(k) or profit sharing plan. The administrative costs to offer a retirement plan will vary depending on company size and whether you match a percentage of your employee’s contributions. You can match your employee’s contributions dollar for dollar or a percentage (which is usually between 3 percent and 6 percent). To learn more, read our article on small business retirement plans.
Workers Compensation Insurance
On top of payroll taxes, you are required to carry workers compensation insurance. This insurance is used to cover employees who are injured on the job. Every state except Texas requires all employers to carry workers compensation insurance.
The cost of workers compensation insurance is based on the industry and type of job. The riskier the job, the higher your costs will be. For example, the average rate for a roofer is about $21.32 per every $100 in wages, whereas the average rate for a bookkeeper who sits in an office is about 17 cents per every $100 in wages. Let’s take a look at how to calculate workers compensation insurance for both a roofer and a bookkeeper making $30,000/year.
Workers Compensation Insurance Calculation: Roofer vs. Bookkeeper
Roofer: $30,000/$100 = $300 X $21.32 = $6,396 per year
Bookkeeper: $30,000/$100 = $300 X 0.17 = $51 per year
What a difference! Both the roofer and the bookkeeper make the same salary, but the additional cost for workers compensation for the roofer is $6,396 vs. $51 for the bookkeeper. Other than a paper cut, the likelihood that the bookkeeper will become seriously injured on the job is a lot less than someone who spends their time climbing roofs all day.
Now that we have provided you with the key employer payroll costs, check out this Employer Cost Calculator created by Intuit. You can plug in your actual figures to come up with an estimated total payroll costs for your business.
Payroll is one area where I recommend you hire an expert. The employer portion of payroll taxes can be tricky to calculate if you’re trying to do it yourself. Instead, it’s better to get payroll software that can do the calculations for you so that you can streamline the process and be confident you’re collecting and paying the right amounts.
When you’re ready to hire that first employee, we recommend using a tool like Gusto to handle the calculations of employer payroll taxes for you. All you have to do is provide the hours worked for each employee and Gusto will calculate paychecks, pay payroll taxes and file the payroll tax forms for you.
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