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All those abbreviations on a paycheck might seem indecipherable. So we're simplifying payroll taxes for you by identifying the three major types your business will encounter.
Every new hire at your business is required to immediately complete an IRS W-4 form. Failure to do so can lead to financial penalties. The W-4 is important, because the options selected by the new employee will determine the amount of money that will be withheld from each check for both federal and state taxes. Employees should fill out this form very carefully, since an error can lead to over-paying or large amounts being owed at end-of-year. IRS Publication 15, the Employer's Tax Guide, provides detailed instructions on translating the employee's selections into actual withholding. You can also skip complicated calculations by using Tax, Pay & File.
The first element of a paycheck's FICA contribution is dedicated to Social Security. Within that Social Security contribution, half is paid by the employer, and half is paid by the employee. In 2019, both employers and employees will be taxed 6.2% of gross pay on earnings up to $132,000. The employer and employee contribution combine for a total Social Security tax of 12.4%.
The second part of FICA is a contribution to Medicare. Just like Social Security, the Medicare tax consists of matched contributions by employee and employer. Each party pays 1.45% of gross salary to support this federal healthcare program.
Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) work in concert to make the final payroll tax deductions. The base pay for calculating FUTA is $7,000 - that's the amount of annual income the federal government taxes (at a rate of 6%) for support of unemployment insurance programs. However, if the employee is in a state that is up-to-date in their contributions to this program (all states currently qualify), the FUTA tax rate is reduced from 6% to .6%. The base pay and rates for State Unemployment Tax (SUTA) are highly variable by jurisdiction.
Some counties and cities also levy an unemployment tax, but these instances are few and far-between.
Federal, state, and city taxes can feel confusing. The penalties for late or non-payment can be very large, and if you have a business of a certain size, you may be required to pay on a more frequent schedule. The best way to avoid penalties for late and non-payment is by using Tax, Pay & File from Future Systems. You can automate your process, stay compliant, and never deal with the IRS again. Contact us today!