Tag Archives: employer taxes

How to Calculate Your Payroll Tax Liability

As an employer, it’s your responsibility to make contributions to federal programs like Social Security, Medicare and unemployment insurance. These fall under the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA), and employment taxes are used to fund these programs. Consequently, you need to calculate your payroll tax liability and report it to the IRS. Otherwise, you run the risk of an audit and getting penalized. Here’s how it’s done.

 

Calculate Social Security Tax

As of March 2015, the Social Security tax rate is 12.4 percent. This total is split up so that the employer pays half and the employee pays the other half. This means that you’re required to pay 6.2 percent. You should also know that Social Security tax had a wage base limit of $118,500 in 2015. This means that you’re only responsible for paying taxes on the first $118,500 on an employee’s earnings.

To calculate what you owe on Social Security tax, you need to multiply your total payroll by 0.062. Just remember the wage base limit if any employees earn more than $118,500. If anyone falls into this category, then you would owe a maximum of $7,347.

Keep in mind that the wage base limit changes, so it’s smart to check with the IRS each year before proceeding. You can find updates on withholding rates here.

 

Calculate Medicare Tax

As of March 2015, Medicare tax is 2.9 percent, with the employer being responsible for 1.45 percent and the employee being responsible for the other 1.45 percent. There is no wage base limit on Medicare tax, so you’re required to pay taxes for the full amount that each employee earns. This can be calculated by multiplying your total payroll by 0.0145. Again, the percentage you’re responsible for can vary from year to year, so you should verify the number with the IRS.

 

Calculate Unemployment Tax

Unlike Social Security and Medicare, only employers make contributions to the Federal Unemployment Tax Act (FUTA). For 2015, employers must pay 6 percent for the first $7,000 that each employee makes. To calculate this number, you simply multiply 0.06 for each employee’s earnings up to $7,000.

You can streamline this if all of your employees earn at least $7,000 because it translates into you paying $420 for each employee. So if you have 10 employees, you would pay a total of $4,200.

 

Determine if You Must Pay a Medicare Surtax

Ever since November 26, 2013, a Medicare surtax of 9 percent went into effect that applies to employers with workers that reach certain earnings. The threshold amount depends upon a person’s filing status and breaks down like this:

 

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

 

If you have any employees that reach these earnings, you can calculate your tax contribution by multiplying 0.09 by how much they earned.

After calculating your contributions for Social Security, Medicare, unemployment insurance and if applicable, the Medicare surtax, add all of those contributions together for the grand total. Staying on top of this should ensure that your business stays compliant, and you can avoid penalties and a lot of stress.

 

How the PPACA Affects Payroll

The Patient Protection and Affordable Care Act (PPACA) of 2010 was the biggest healthcare reform since 1965 and has resulted in big changes for businesses. Besides altering the way that employers provide their employees with healthcare, it’s also changed certain aspects of financial record keeping. As a result, it’s important to stay on top of these changes to ensure that your business remains compliant in the future. Here are some specific ways that the PPACA affects payroll.

 

Medicare Payroll Tax

For individuals earning more than $200,000 annually, there has been an increase in their payroll tax. Although there was a Medicare payroll tax of 1.45 percent in the past, the PPACA has resulted in a new surtax for some employees. This means that high-income earners must now pay 2.35 percent when their wages are higher than $200,000. The interesting thing about this is that the increase in payroll tax doesn’t actually contribute to Medicare, but simply covers the PPACA’s expansion.

 

Increased Tax on High-Income Earners

While normal Medicare tax on most employees is 2.9 percent, there is now an added 0.9 percent tax on wages exceeding $200,000 for individuals who are single or head of the household and $250,000 for those who are married and filing jointly. This means that these high-income employees now pay a grand total of 3.8 percent. Consequently, you are now responsible for withholding the extra 0.9 percent for qualifying employees.

 

Health Insurance Coverage Aggregation for W-2 Reporting

Although it won’t impact smaller businesses, the PPACA will affect payroll reporting for employers who file 250 or more W-2 forms each year. Under the new system, employee sponsored health coverage for the following items must be aggregated when filing this volume of forms:

  • Major medical coverage
  • Domestic partner coverage included in gross income
  • Hospital and indemnity or specified illness paid through salary reduction or by employers
  • Health flexible spending accounts in excess of employee’s cafeteria salary reductions for all qualified benefits.

If you charge a COBRA premium, then you must also aggregate:

  • Employee assistance plans providing employer sponsored healthcare coverage
  • Employee sponsored wellness programs
  • On-site medical clinics provided by employers

The amount that you report should cover your portion as an employer and whatever your employees pay for one lump sum.

Regardless of your stance on this healthcare reform, there’s no denying the impact it’s had on business owners and employees. While the changes to payroll aren’t necessarily monumental and primarily impact larger companies, you will still want to be aware of how the PPACA affects payroll taxes and reporting. It’s also important to stay updated on this and similar laws and regulations that can influence your business and the way you handle taxes.