ER taxes, also known as employer taxes, are levied on employers based on their employees’ gross wages and compensation. Failure to pay these taxes on time may result in legal action being taken against the company.
These taxes include Social Security, federal unemployment insurance (FUTA), state unemployment insurance (SUTA), Medicare, and local taxes. The Federal Insurance Contributions Act (FICA) is a payroll tax paid by both the employer and the employee that funds Social Security and Medicare. Because Social Security is taxed at 6.2% and Medicare is taxed at 1.45%, the FICA rate is 7.65% for employees and 7.65% for employers.
According to the United States Department of the Treasury, payroll taxes accounted for approximately 31% of federal tax revenue in the fiscal year 2021. That is $1.25 trillion out of a total of $4.05 trillion. Employers collect payroll taxes on behalf of their employees and remit them to the government. If you look closely at your earnings statement, you’ll notice that payroll taxes take a significant chunk of your paycheck.
Most states, as well as some cities and counties, levy income taxes, which are paid directly into their coffers. Furthermore, employers, but not employees, pay federal unemployment taxes on behalf of each employee.
Unlike the progressive income tax in the United States, some elements of payroll taxes are levied only up to a specific yearly limit. For example, any income that exceeds the Social Security wage base, which is set at $142,800 in 2021, is exempt from Social Security taxation, making the United States payroll tax regressive. In the 2022 tax year, this limit will be raised to $147,000.
Social Security and Medicare Taxes
Employers must generally withhold and pay the employer share of social security and Medicare taxes from their employee’s wages.
The rates of the Social Security and Medicare taxes differ, and only the Social Security tax has a wage base limit. The wage base limit is the maximum taxable wage for the year. Multiply each payment by the employee tax rate to calculate the withholding amount for social security and Medicare taxes.
Employers must withhold the 0.9% Additional Medicare Tax on an employee’s wages and compensation that exceed $200,000 in a calendar year in addition to the Medicare tax. You must begin withholding Additional Medicare Tax in the pay period in which you pay employee wages in excess of $200,000 and continue to withhold it until the end of the calendar year. The Additional Medicare Tax has no employer match.
What percent of federal income tax is withheld?
As an employer, you withhold income tax on your employees’ behalf and remit it to federal, state, and local tax authorities quarterly.
You’ll need a copy of your employee’s Form W-4 and their gross pay to figure out how much federal income tax to withhold.
The next step is deciding which method to use to calculate withholding. Most employers have the option of using either the Wage Bracket Method or the Percentage Method. While not exactly simple, the wage bracket method makes calculating payroll tax easier.
What a manager should know about employer taxes
Employers’ roles in payroll taxation can be viewed as a combination of two distinct responsibilities. The first component of payroll taxes is the deduction from an employee’s wages to cover tax expenses, which is the responsibility of the employer. The second component for which an employer is responsible is paying a tax amount based on an employee’s salary level.
An employer is responsible for withholding a portion of an employee’s wages to pay for taxes such as Medicare and Social Security.
To deposit withheld tax dollars, you must first determine whether your company’s accrued tax dollars qualify you as a semiweekly or monthly depositor.
The payroll tax is complicated. The calculations are nitpicky, and the consequences are severe. Paying payroll taxes even a day late incurs a 2% penalty on the amount owed, with the penalty increasing to 15% for past-due payroll taxes.
If you’re prefer to avoid the stress, we recommend outsourcing your payroll to an accounting expert, such as ourselves. We will handle everything from paying your employees the correct amount at the right time to dealing with pesky withholding calculations and payroll taxes.