February 24, 2022
The actual cost of paying each one of your employees exceeds their hourly wage. Even if you don’t provide benefits or paid vacation, having an employee on your payroll will still require you to pay certain taxes and expenses.
Employer’s Contribution to Social Security
The tax you pay as an employer is used to fund Social Security payments. In 2022, each employee’s wages up to $128,400 will be taxed at 6.2 percent. There is no more tax imposed when an employee’s annual salary exceeds $128,400.
These payments go into the general Medicare fund. In 2022, the Medicare tax will be 1.45 percent of each employee’s wage. The Medicare tax has no wage base restriction, unlike Social Security. On the other hand, if an employee’s salary reaches $200,000 in a calendar year, you need to deduct an additional 0.9 percent from their pay.
The Federal Unemployment Tax Act (FUTA)
Benefit payments for unemployed workers are funded by the federal unemployment insurance system as well as state programs. The FUTA rate for 2022 is 6% of the first $7,000 in workers’ wages.
State Unemployment Insurance
You may be responsible for paying a state unemployment tax in addition to the federal unemployment tax. Tax rates and policies may differ by state. Employers can receive a credit against the FUTA tax for the state unemployment tax they pay. Currently, the highest credit is 5.4 percent.
Other costs associated with hiring an employee are difficult to avoid. All states require you to pay for workers’ compensation insurance if you have an employee on your payroll. Rates vary from state to state, but the median rate is roughly $1.00 per $100 of payroll, according to Oregon’s 2020 report. In 2022, you may have to pay 1.70 percent of an employee’s total wage for workers’ compensation insurance in California.
Payroll tax calculation, withholding, and remittance is a time-consuming and complicated process. Hence, it is best to hire a payroll provider or accounting firm offering a payroll service to handle your payroll.
What Employers Will Pay
Employers should anticipate paying 10% or more in payroll taxes, unemployment taxes, and workers’ compensation insurance, according to Fit Small Business’s estimates. Because social security and unemployment taxes scale out at a specific wage rate, employers will pay low-paid employees a higher relative percentage than high-paid employees. If your company operates in a state with a high unemployment tax and workers’ compensation at a higher rate, such as California or New York, this will add a few percentage points to your costs.
You may want to consider independent contractors or accounting firms if you don’t want to pay more taxes, insurance, or high payroll processing costs. They’ll most likely charge more than an hourly employee, but it might be worth it to avoid the taxes and headaches. If you absolutely need help, consider hiring a family member as well. The IRS provides payroll tax benefits to sole owners and partnerships that hire their spouses and children. Small-business owners who hire their children do not have to pay Social Security, Medicare, or FUTA taxes if they meet the conditions, and they can avoid paying the FUTA tax by hiring their spouse.
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Even though we are based in Albany, NY, we offer our expertise in business accounting, bookkeeping, and tax preparation all across the United States.