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Whether you've been in business for years or just starting out, many people still don't understand all the payroll taxes out there and how much it really costs to employ someone. Here is quick summary of the real costs of hiring someone and the payroll taxes you'll have to pay.
Different Payroll Related Taxes
|
Employee |
Employer | |
|
Federal Income Tax on Wages |
Amount determined by tax tables and information on employee's W-4 |
$0 |
|
State Income Tax on Wages |
Amount determined by tax tables and information on employee's W-4 |
$0 |
|
Social Security Tax |
6.2% of wages up to $106,800 |
6.2% of wages up to $106,800 |
|
Medicare Tax |
1.45% of all wages |
1.45% of all wages |
|
Federal Unemployment Tax (FUTA) |
$0 |
6.2% of the first $7,000 wages paid to each employee |
|
State Unemployment Tax (SUTA) |
$0 |
Rate determined by state multiplied by the state's wage base |
It is important to note that even though there are certain taxes that are the Employee's responsibility, they are usually withheld by the Employer and submitted to the correct tax authorities. Businesses are usually required to submit the taxes periodically throughout the year. The timing will depend on the total amounts withheld and will be determined by the taxing authority. It is important to know when those taxes are due and how to report them.
Employee vs. Independent Contractor
A lot of businesses prefer to list someone as an independent contractor because you don't have to worry about withholding taxes and paying the employer's portion of the Social Security and Medicare tax, but the IRS does not look kindly on businesses that do this if the worker is in fact an employee.
How do you know if someone should be classified as an employee? Well, under common law there are three categories we look at to determine the person's status. They all look at the degree of control and independence in the relationship between company and worker. Here are those three categories to examine and related questions the come almost verbatim from the IRS's website.
1. Behavioral: Does the company control (or have the right to control) what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits - pension plan, insurance, vacation pay, etc? Will the relationship continue and is the work performed a key aspect of the business?
If you determine the worker is an independent contractor, have them fill out a W-9 to keep on file for at least 4 years for future reference, if there is ever a question about the relationship. You also want to file a Form 1099-Misc yearly for contractors that you pay $600 or more during the year. Forms must be provided to the independent contractor by January 31st of the following year and must be submitted to the IRS by February 28th.
The information supplied here is for a general understanding and may not apply to your specific situation. If you want to learn more about Employer taxes, take a look at the IRS's Publication 15
