Small business payroll tax is just one part of the overhead cost of having employees. Overhead is a generic term referring to costs above normal operational costs. For employees, this means the costs above their base pay. This runs about 1.25 to 1.4 times their base pay (per year).
When an employee is promised $50,000 per year, you’re real cost is $62,000 – $70,000 per year. This does not include costs of training, increased supervision, and the load on other resources like increased parking, office space, work errors, facility usage and other tax requirements.
As a business decision, there are many factors outside just paying a basic hourly rate or which accounting method we’ll use. Lets begin with the big one – Payroll Taxes (Social Security and Medicare). For this article, we included unemployment and disability insurance, because they are mandated by different states.
Small business payroll tax: FICA
For a good explanation lets look to Bizfilings.com. “An employer’s federal payroll tax responsibilities include withholding from an employee’s compensation and paying an employer’s contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA)…. FICA taxes are somewhat unique in that there is required withholding from an employee’s wages as well as an employer’s portion of the taxes that must be paid….
Requires you to withhold three separate taxes from the wages you pay your employees.
- a 6.2 percent Social Security tax;
- a 1.45 percent Medicare tax (the “regular” Medicare tax); and
- beginning in 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.
The law also requires you to pay the employer’s portion of two of these taxes:
- a 6.2 percent Social Security tax; and
- a 1.45 percent Medicare tax (the “regular” Medicare tax).
In other words, you withhold a 6.2 percent Social Security tax from your employee’s wages and you pay an additional 6.2 percent as your employer share of the tax (6.2 employee portion + 6.2 employer portion = 12.4 percent total). Also, you withhold a 1.45 percent Medicare tax from your employee’s wages and you pay an additional 1.45 percent as your employer share (1.45 employee portion + 1.45 employer portion = 2.9 percent total). The total of all four portions is 15.3 percent …
As one can see, a 15.3% hit over and above employees base pay is quite a chunk of money for a small business owner. This does not take into account the cost and extra time to comply to this rule. This requires keeping track (and having the money) to make regular scheduled payments, filling out appropriate paperwork and the accounting rules that govern the different portions of your payroll.
Small business payroll tax: Unemployment Insurance
Unemployment insurance is technically not a tax, but when its a mandatory payment it might as well be. According to smallbusiness.chron
Unemployment compensation is a monetary benefit out-of-work individuals receive to help pay living expenses until they return to work. In conjunction with state unemployment agencies, the Federal Unemployment Tax Act requires employers to pay taxes towards state unemployment funds. Taxes employers pay are designed to pay benefits for workers who are eligible to receive them… An unemployed worker may receive benefits if he became unemployed through no fault of his own. In other words, if the employer lays off the worker or goes out of business, the worker qualifies for benefits.
Each state will calculate these in different ways. Here’s a look from QuickBooks website about unemployment tax costs.
Unemployment taxes are calculated on “base wages.” These are set by your state, and they decide on a “multiplier” as a “percent” of tax applied to those base wages. For example, in Illinois, the first $12,960 of each employee’s income is the base wage, and new businesses are taxed at a rate of 3.75%. So the unemployment insurance tax for a single employee at a new business in Illinois is $12,960 x .0375 = $486.00 per year. In California, the first $7,000 is the base wage, and it’s taxed at a rate of 3.4%, which works out to $238 per employee each year. This “percentage” multiplier is what you can control and use to lower your taxes. The more unemployment claims former employees successfully make, the higher the multiplier will be for your business…
Small business payroll tax: Disability Insurance
Again, technically not a tax, but for the 5 states that require mandatory Disability Insurance it basically is. These 5 states include – California, Hawaii, New Jersey, New York and Rhode Island, and these make up almost a quarter of the U.S. Population. Disability Insurance has two aspects, short-term and long-term. These covers a portion of a worker’s salary if they become disabled or unable to work.
The costs run between a quarter to half percent of employees salaries or wages. These costs vary. So check your states regulations and talk to a payroll expert in your area. Check out our 12 small business insurance options for more on various insurance needs.
As a past small business owner, my greatest advice is to hire someone who does payroll, regardless of business entity. There’s probably a number of service professionals in your area that can help you. Especially in the beginning. So do the research. It’s well worth it.