When you begin to hire employees, your expenses will increase not only by the wage/salary that you pay your employees but also by payroll taxes and workers comp insurance. Payroll taxes include social security and medicare taxes (collectively called FICA taxes) and unemployment taxes. In addition, if you live in a state other than Texas, you will have to purchase workers compensation insurance. This guide explains everything you need to know about these payroll expenses, including 2017 rates.
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2017 Payroll Tax Rates Table
Unlimited (no income cap for medicare)
All other states 0.6%
Based on the above chart, you could pay an average of $3800 in FICA, 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 are also known as FICA (Federal Insurance Contributions act). This makes up the bulk of payroll taxes you must pay as an employer:
- For social security, you must pay 6.2% of employee salary/wages, up to a maximum salary/wage of $127,200 (for 2017).
- For medicare, you must pay 1.45% of employee salary/wages; unlike social security, there is no salary/wage cap.
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 and medicare 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.
$128,000 X 0.0145 = $1,856.00
For medicare, we used the total salary of $128,000 that was earned to calculate your employer share of medicare. Unlike social security, there is no salary/wage cap on medicare.
Unemployment Insurance (FUTA & SUTA)
As an employer, you are also required to pay unemployment insurance at both the federal and state level.
State unemployment tax rates (known as SUTA or SUI) 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. This rate is effective beginning January 1, of the following year.
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 state of California owes money to the federal government, so as a result California employers must pay 1.8% for FUTA tax.
FUTA tax is only assessed on the first $7,000 in wages for each employee. For California employers, this would result in $126 per employee ($7,000 times 0.018). For employers in the remaining 49 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 here.
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, worker’s 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 $18.62 per every $100 in wages vs. someone who works in an office like an accountant, whose rate is approximately 15 cents per $100 in wages. Rates will also vary by state, so be sure to check out our full guide to worker’s comp insurance. In this guide, you will learn more about the requirements, how much you will pay, and where to buy workers comp insurance.
The Bottom Line
In summary, we have covered the following additional costs that you are responsible for as an employer:
- Social Security Tax
- Medicare Tax
- Federal Unemployment Insurance (FUTA)
- State Unemployment Insurance (SUTA)
- Workers Compensation
Whether you have just hired your first employee or you’ve had employees for a while now, keeping up with new hire requirements can be overwhelming. This is one of the reasons that we recommend that you use a payroll software program like Gusto.
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 within Gusto. Managing your payroll with Gusto will ensure that your payroll tax payments and tax forms are filed on time so that you can avoid interest and penalties.