Every small business owner needs to make sure they take care of all taxes for their business and workers, be it local, state or federal taxes, including payroll taxes.
All businesses must pay payroll taxes. As a result, this article will explore what payroll taxes are, what you need to pay and other essentials.
Who pays Payroll taxes?
Everyone, employer and employee, need to pay their portion of payroll taxes to Uncle Sam: the employer payroll taxes and employee payroll taxes. However, the employer is charged with deducting and submitting such tax payments and making sure they are accurate and remitted on time.
The employer covers the tax responsibility of their worker as they need to withhold what their worker will pay as payroll taxes from their paycheck every pay period, which must also be submitted on behalf of such employees. The worker can also check their pay stub to know what was deducted as payroll tax by their employer. Such tax payment will be made directly to Uncle Sam to cover their charges, called the employer's portion.
Understanding Payroll Taxes and Examples
Payroll taxes are hinged on worker's compensation, which includes all tips, wages, and salary. While the federal government can decide to use income tax in many ways, payroll taxes are used majorly to power the United States social service program.
As a result, payroll taxes exist in different types:
Federal Insurance Contributions Act Tax is known as (FICA)
Federal Unemployment Tax Act is known as (FUTA)
State Unemployment Tax Act is known as (SUTA)
Federal Insurance Contributions Act Tax (FICA)
FICA is the first example of payroll tax.
The Federal Insurance Contributions Act Tax powers Social security and Medicare and is directed into two separate trust funds – Old Age and Survivors Insurance Trust Funds. It also takes care of survivor and retirement benefits, alongside the Disability Insurance Trust Fund that gives disability benefits. Currently, FICA is placed at 15.3%, in which the employee pays half and the employer also pays half.
On the other hand, self-employed people are classified as both the employer and the employee based on Uncle Sam's standard. As a result, they have to pay the entire 15.3% tax, also called the self-employment tax.
Understanding the Federal and State Unemployment Tax Act (FUTA and SUTA)
Even though employees only have to pay FICA taxes, employers are not let off the hook that easily. They are responsible for unemployment insurance for the state and federal government. FUTA tax, or the Federal Unemployment Tax Act, is 6% of the first $7,000 that the employee earned.
The State Unemployment Tax Act, known as SUTA, which takes care of unemployment insurance, is different in each state.
Payroll Taxes and Other Tax Types: Understanding the Difference
The significant way payroll tax stands out from another tax type, especially income taxes, is the primary way such tax is paid. This is also the primary reason why these two taxes are usually distinct. As explored above, the payroll tax is majorly used in taking care of essential social programs like Medicare, Social Security, and unemployment insurance both at the federal and state level.
The idea behind payroll taxes is that workers and their employers will pay into such a social program while the employee is on the job. However, the worker has access to such a program at any time they need them. As a result, workers and employers will have to pay Medicare tax and Social Security taxes using FICA throughout their careers. As a result, the worker gets access to Social Security or Medicare benefits at old age when they can no longer work and need extra support.
Federal income tax does not work the same way. As the federal government receives income taxes from workers, it can be directed to the funding of any government program that is essential. This also applies to local income tax and state tax as they are used to fund programs at either the state or local levels.
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