What are employer payroll taxes

Employer payroll taxes refers to the segment of payroll taxes that the company is liable to pay, including Medicare tax, federal unemployment tax, state unemployment tax, and Social Security tax. 

It’s not only employees who are taxpayers, but employers also need to manage tax deductions. Understanding payroll tax and all that it includes is essential to remain compliant.

What are employer payroll taxes?

Employer payroll taxes refers to the total amount of payroll taxes collected by the employer from the employee to cover employee benefits and unemployment funds. It also includes company expenses that the employer has recorded.

Employers have the responsibility to handle payroll taxes, which includes determining income tax withholding, depositing employment taxes based on a set schedule, and reporting employment taxes quarterly.

In the United States, consider the following types of employer payroll taxes;

Social Security Tax

According to the U.S Social Security Administration, both employer and employee contributions make up Social Security payroll tax. Employers pay 6.2 percent of an employee’s wage, and the employee matches this contribution. Social Security Tax is one part of the Federal Insurance Contributions Act (FICA). 

Medicare Tax

Medicare taxes are the second of two FICA components.  Employers are responsible for paying 1.45% of an employee’s wage toward Medicare tax, and the employee matches this contribution.

Federal Unemployment Tax Act (FUTA)

The responsibility for Federal Unemployment Tax lies solely on the employer’s shoulders, serving as unemployment insurance. Wages earned over the pay period and the Form W-4 details confirm the total. As of 2021, the FUTA tax rate is 6% of the first USD $7,000 paid to each employee every year. 

State Unemployment Tax Act (SUTA)

State Unemployment Tax is another employer-only payroll deduction, going into the state unemployment fund on behalf of the employee. The rate may differ per state as each state has its own SUTA taxable wage base. Alaska, New Jersey, and Pennsylvania-based employers do not pay SUTA.  

What tax forms do you need as an employer?

Whether you’re a startup founder needing payroll tips or an expanding small business trying to remain compliant, payroll tax is one of the most important aspects of a business to keep in check.  

The IRS (Internal Revenue Service) has outlined several documents needed;

• Form W-2  - reports taxes withheld from employee wages to the IRS

• Form W-3 - provides a summary of Forms W-2

• Form W-4 - the employee’s withholding certificate is completed by the employee to determine the federal income tax withholding amount from employee paychecks 

• Form 940 - reports FUTA liability to the IRS annually

• Form 941 - reports payroll taxes and employee wages filed every quarter

• Form 944 - report federal income and FICA taxes annually

• Form 1095-C - provides health insurance coverage information for employees

• Form 1096 - a summary and transmittal form that is sent with other IRS forms for tax return information

Official IRS publication should be reviewed for due dates on each form.

Take note: the above tax documents pertain to employees and not independent contractors.

Do employer taxes vary by country?

The above details are relevant for U.S businesses that hire U.S-based employees. With the rise of remote work, businesses are forced to consider the tax requirements of other countries as well. 

Each geographical jurisdiction has its version of healthcare, social welfare, pension contributions, and taxes. 

For example, many European countries have different regional taxes based on the part of the country that employees originate from. 

In another example, Canadian employees pay 1.58% Employment Insurance (EI) premiums, determined by their employment income.

When establishing your payroll tax system, you must consider local governments and comply with local taxes. The classification of the worker will also determine the payroll tax implications.

Employer payroll taxes and employee state income tax becomes more complicated for remote teams, with new legal complexities. If you hire across the state and country lines, then you need to know how to set up and run remote payroll and taxes.

How do you calculate employer payroll taxes?

Ultimately, payroll taxes are a percentage of an employee's gross taxable wages. Therefore, the number of employees and their wages will determine the total cost of employer payroll taxes.  

The FICA tax rate is 15.3%, split in half and paid equally by employer and employee (7.65% each). 

• Social Security Tax of 6.2% paid by the employee and 6.2% paid by the employer (totaling 12.4%) 
• Medicare Tax of 1.45% paid by employees and 1.45% paid by employers (totaling 2.9%)

The above is added to employer-only payroll tax rates, namely FUTA and SUTA.

• Federal unemployment tax is 6% on the first $7,000 in employee wages, although it’s not uncommon for businesses to receive a tax credit of 5.4% and only pay 0.6% to FUTA
• State unemployment taxes vary by state, as well as factors such as the length of time you’ve been in business and the number of unemployment claims to your name

The self-employment tax rate includes the full 15.3% of gross taxable wages, plus any additional Medicare tax.

With all of these variables, it’s easiest for business owners to use payroll software which includes an employee cost calculator. 

At Deel, our employment calculator streamlines global hiring by offering a comprehensive and inclusive payroll service. It helps you stay on top of your filing status, meet quarterly federal tax return deadlines, and more.