Payroll management is an essential part of running any business. Generally speaking, payroll is a very complicated process that only gets more complicated as you go from a larger scale (federal laws) to a smaller scale (state & local laws). While it’s probably best to leave the actual payroll management to a designated payroll specialist (or your choice of payroll software), that doesn’t mean as the owner you shouldn’t know a thing or two yourself! Here are five important payroll components worth learning about.
Everyone knows about income taxes, even employees! Income taxes are applied to individuals, couples, and businesses, all of which are taxes at different rates. However, for payroll calculations, the majority of income taxes you’ll be dealing with are individual (employee). Income tax rates vary depending on an employee’s annual income, and whether or not they file individually or jointly with a spouse. Federal income tax applies to everyone, whereas state taxes are only applied in 41 out of the 50 U.S. states. Local taxes, as the name suggests, vary by locality, making them hard to keep track of, especially if you employ remote workers. Fortunately, if you manage your payroll using online payroll software, you won’t need to keep track of all of these separate tax rates yourself; the system will calculate them for you.
Both individuals and employers are responsible for paying FICA (Federal Insurance Contributions Act) taxes. Individual FICA taxes consist of two separate taxes: Social Security and Medicare. Social Security is taxed at a rate of 6.2%, whereas Medicare is taxed at a rate of 1.45%, for a combined total of 7.65%. Since the employer is required to match these amounts, the total percentage collected by the IRS is 15.3%. Although FICA calculations are much simpler than federal, state, and local income taxes, you’ll be happy to learn that your payroll management software will still calculate them nonetheless.
Deductions are split into sub-categories: voluntary and involuntary. Some examples of voluntary deductions would be retirement contributions, insurance premiums, FSA contributions, or tuition deductions. Involuntary deductions include income taxes (federal, state, and local), FICA taxes (Social Security & Medicare), and child support payments.
With the expectation of Texas, all U.S. states require employers to purchase workers’ compensation insurance at some point. That said, the point where you’re legally obligated to purchase it will vary by state. For example, Alabama only requires businesses with five or more workers to purchase workers’ compensation insurance, whereas Connecticut requires all companies with one or more employees to do so. It’s important to double-check the laws in your state to see if (and when) you’ll need to purchase workers’ compensation insurance, so check out this list to learn the law in your state.
FUTA (Federal Unemployment Tax Act) taxes are taxes that are paid solely by employers. These taxes contribute towards federal unemployment benefits; currently, the FUTA tax rate sits at 6.0% for the first $7,000 you pay an employee. SUTA (State Unemployment Tax Act) taxes, on the other hand, aren’t always the sole responsibility of the employer. While the majority of states only require employers to pay SUTA taxes, three states (Alaska, New Jersey, and Pennsylvania) require employee contributions towards the tax as well. Rates vary by state, so you’ll need to check on your state’s laws to determine how much you’ll be responsible for paying.
Payroll As a Whole
Even after just touching over these five main payroll components, it becomes clear that payroll calculations are a very complex and intricate matter. Unfortunately, simply misunderstanding or miscalculating payroll deductions isn’t an acceptable excuse for the IRS (or any other government tax agency), so it’s critical that businesses get their numbers right the first time. Fortunately, you don’t have to do it yourself or leave it up to payroll specialists. Payroll software companies like UZIO have access to the most up-to-date tax laws and can provide you with software solutions that calculate taxes correctly. Even better, these systems are automated, essentially allowing your payroll to run itself! If avoiding fines and saving time sound like appealing options, it may be time to consider implementing payroll processing software for your company.