When you hire employees, you not only have to pay their wages but will also have to cover the associated payroll taxes and workers comp. Payroll taxes include Social Security and Medicare taxes (FICA taxes) and unemployment taxes. In addition, if you operate in a state other than Texas, you have to purchase workers compensation insurance.
If you want to avoid the stress and hassle of manually paying FICA taxes and unemployment insurance, you can use a payroll program like Gusto. Their payroll software manages all aspects of payroll, including automatically paying payroll taxes and more. Sign up for a free trial and your first month is free.
Employer Payroll Tax Rates & Unemployment Insurance
| Percentage of Employee Wages | Income Cap on Taxes | Total Cost for Employee Earning $30,000 Annually | |
|---|---|---|---|
| Social Security Taxes | 6.20% | $127,200 (tax year 2017) $128,700 (tax year 2018) | $1,860 |
| Medicare Taxes | 1.45% | Unlimited (no income cap) | $435 |
| State Unemployment Insurance* | Typically 2.7% - 3.4%+ | Typically $7,000 - $10,900+ | $810 - $1,020 |
| Federal Unemployment Insurance (FUTA) | CA/Virgin Islands: 2.1% All other states: 0.6% | CA/Virgin Islands: $7,000 All other states: $7,000 | CA/Virgin Islands: $147 All other states: $42 |
| Workers Compensation Insurance | Typically $1.00 per every $100 paid in wages, but varies widely | N/A | $300 |
*Avg new employer rates
Based on the above chart, you could pay an average of $3,600 in FICA tax, unemployment tax and workers comp insurance for an employee earning $30,000 per year.
Note: Keep in mind that state unemployment rates will vary depending on how often you fire employees and how many of those employees who have been fired receive unemployment benefits. Each year around November or December, you will receive your new rate in the mail. If you do not receive this information, you should contact the employment development office to obtain this information.
FICA Taxes (Social Security + Medicare)
Social security and Medicare taxes are also known as FICA taxes. This makes up the bulk of payroll taxes you must pay as an employer. These FICA taxes are paid either monthly or bi-monthly and reported quarterly using Form 941. This is typically automatically facilitated by a payroll software like Gusto.
The 2 FICA tax rates for employers are:
- Social Security tax rate – You must pay 6.2% of employee salary/wages, up to a maximum wage of $127,200 (2017 tax year) or $128,700 (2018 tax year)
- Medicare tax rate – You must pay 1.45% of employee salary/wages; unlike Social Security, there is no salary/wage cap.
Employers and employees each contribute 50% of the entire Social Security and Medicare tax (FICA tax). This means that the actual Social Security tax rate is 12.4% and the actual Medicare tax rate is 2.9%. However, employers are only responsible for paying 50% of these taxes and withholding the remaining 50% from employee paychecks.
Social Security Tax Rate Example
Let’s assume that you have an employee that earned $128,000 for the year. Here is how you would calculate your employer share of Social Security taxes:
$127,200 X 0.062 = $7,886.40
Since this employee’s salary of $128,000 exceeded the salary cap of $127,200 for Social Security, your employer share of Social Security is based on 6.2% of $127,200 and not the entire $128,000 that the employee earned for the year. Remember, however, that you pay these taxes either monthly or bi-monthly, stopping only after an employee has hit the $127,200 annual threshold.
Medicare Tax Rate Example
For Medicare, we used the total salary of $128,000 that was earned to calculate your employer share of Medicare. This is because unlike Social Security, there is no salary/wage cap on Medicare. Here’s how you would calculate your employer share of Medicare taxes for an employee who earns $128,000 annually:
$128,000 X 0.0145 = $1,856.00
Remember that Medicare taxes are also paid either monthly or bi-monthly. For step by step instructions on how to pay your FICA taxes and accurately report payments using Form 941, check out our Fica and Form 941 tax guide.
Unemployment Insurance (FUTA & SUTA)
As an employer, you are also required to pay unemployment insurance at both the federal and state level for each of your employees. These are known as either federal unemployment tax (FUTA) or state unemployment tax (SUTA). These taxes are due annually and filed using Form 940; you pay this tax regardless of whether or not you actually have a former employee collecting unemployment.
State Unemployment Tax Rates
State unemployment tax (SUTA) rates are set by the state for each employer. SUTA rates are generally based on the number of employees that you have fired and how many of those employees make unemployment claims.
Depending on the process established by your respective state, you will either receive your unemployment rate via snail mail or electronically sometime between October through December. Typical rates range from 2.7% – 3.4%+. This rate is effective beginning January 1, of the following year.
Federal Unemployment Tax Rates
Federal unemployment tax rates (known as FUTA) is a flat 6%. However, if you have paid your state unemployment taxes on time, your FUTA tax is reduced to 0.6%. The current exception to this rule is employers in the state of California & the Virgin Islands. The state of California & the Virgin Islands owe money to the federal government, so as a result California & Virgin Island employers must pay 2.1% for FUTA tax.
FUTA tax is only assessed on the first $7,000 in wages for each employee. For California & Virgin Island employers, this would result in $147 per employee ($7,000 times 0.021). For employers in the remaining 48 states, this would be $42 per employee ($7,000 times 0.006).
For more information on FUTA tax rates and filing requirements, check out our full guide on FUTA and Form 940.
Workers Compensation Insurance
In addition to the payroll tax obligations, you are also required to carry workers’ compensation insurance. Workers comp insurance covers your employees in case they are injured on the job. Every state except for Texas requires employers to carry workers compensation insurance.
In most states, workers compensation insurance is sold and underwritten by private companies, although some states require you or allow you to buy it from specific state-managed carriers. In general, workers compensation insurance costs are based on industry. The riskier the job, the higher the rate.
For example, the rate for a roofer is about $21.32 per every $100 in wages vs. someone who works in an office like an accountant, whose rate is approximately 17 cents per $100 in wages. Rates will also vary by state, so be sure to check out our full guide to workers’ comp insurance.
The Bottom Line – FICA Tax
Whether you have just hired your first employee or you’ve had employees for a while, keeping up with new hire requirements can be overwhelming. One component of these requirements is that you adhere to and pay all necessary payroll taxes like FICA Tax.
Luckily, Gusto is able to handle full cycle payroll, which includes setting up employees, calculating paychecks, and calculating all of the payroll taxes we have discussed in this article. You can also purchase and set up workers comp with Gusto. Sign up here for a free 30-day trial.
Kelly Cooper
We have a new business in TN. Is TN a state that we must take worker compensation out for our employee, we have 2 right now. If so does the company pay for it or is it deducted out their payrolls like Medicare and Social Security? Thank you for your help.
Laura Handrick
HI Kelly,
I’m in the process of writing an article that contains a state-by-state workers comp table and instructions on how to buy it. From what I see, unless you’re in construction, you don’t have to provide workers comp until you have 5 employees in TN. However, it’s not a bad idea to purchase it anyhow! In TN you purchase it through your insurance carrier (like any other business insurance) or, if you use a payroll provider They’ll often be able to set up and deduct workers comp for you. The best way to buy it is with a pay-as-you-go option, where they take out only the premium for that pay period, instead of requiring the entire premium up front based on your estimated annual payroll. If you don’t have a carrier, The Hartford is a good one for Workers’s comp — but first check with your payroll provider. For example, if you use Gusto or ADP, they’ll be able to get workers comp setup for you. And to clarify, it’s not something the employee pays for, it’s employer paid, but is based on the employee’s job role and payroll $. (Just to be confusing, some states do offer it from a state fund and process it similar to a an employer payroll deduction, but in TN, you purchase it yourself.)
Best!
Laura, HR Staff Writer
Chimene
What deductions come out of a paycheck for a nonunion construction worker?
Crystalynn Shelton
Hi Chimene,
If your employer is not taking out state and federal income tax then you must deduct those as well as Medicare and Social Security taxes. I have listed a couple of other great resources that might be helpful to you:
Guide to Basic Payroll Deductions: https://fitsmallbusiness.com/how-to-do-payroll-accounting/
Federal Labor Laws: https://fitsmallbusiness.com/federal-labor-laws/
Thank you for reading!
Crystalynn Shelton
Sjb
In the state of Kentucky do you still have to take workers comp out of employees payroll taxes even if you already paid the workers comp up front to your insurance company?
Crystalynn Shelton
Hello, unfortunately I am not familiar with the workers comp laws in Kentucky. Check out their website or give them a call for additional assistance: http://insurance.ky.gov/static_info.aspx?static_id=27&MenuID=88&Div_id=15.
Thank you for reading!
Crystalynn
Christine
The amount taken out for Social Security – is it always the exact same amount for employer and employee
Jeremy Marsan
Just about always. The only exception I’m aware of is for employees who earn over $200,000. These employees are required to pay an additional 0.9% Medicare surtax. Employers are not liable for this expense.
Brian Patterson
I was wondering, in Texas does a employer have to have workmans comp to with hold regular taxes in paycheck. I’m getting overwelded by what I owe the it’s at years end when he considers me sub contractor and doesn’t take taxes out. He says he can’t do it unless he has workmans comp. And it’s to expensive. Lost here.
Kal
you’ll find this useful re: workers comp in texas:
http://www.cbs.state.or.us/external/dir/wc_cost/map.html
Jeremy Marsan
Hi Brian. Ironically, Texas is one of the few states that do not require workers comp insurance for most small businesses. However, if your employer has a policy already, you would indeed have to be added to that policy if you wanted to switch from a contractor to a proper employee.