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In the United States, owners of businesses are required to pay a tax called FICA taxes. The owner is responsible for paying Social Security and Medicare taxes on behalf of his employees. If an employee cannot work due to illness or injury then they may be eligible for unemployment insurance and workers’ compensation coverage from their employer. How will these changes affect small business owners?
FICA (Federal Insurance Contributions Act) is a federal legislation that mandates businesses to deduct three taxes from their workers’ wages: 6.2 percent for Social Security, 1.45 percent for Medicare, and 0.9 percent for those earning more than $200,000. You must additionally pay unemployment taxes and workers’ compensation in addition to FICA taxes.
Unemployment Insurance and Employer Payroll Tax Rates
Average new employer rates and other statistics were obtained from the Department of Labor and the Internal Revenue Service.
According to the table above, an employee earning $30,000 per year may pay an average of $3,600 in FICA tax, unemployment tax, and workers’ compensation insurance.
Keep in mind that state unemployment rates will fluctuate based on how often you dismiss workers and how many of those fired get unemployment benefits. You will get your new rate in the mail every year around November or December. If you do not get this information, contact your local job development office. It’s critical to keep track of this so you don’t fall behind on payroll compliance requirements.
Rates of FICA Contributions (Social Security & Medicare)
FICA taxes are the acronym for Social Security and Medicare taxes. As an employer, you must pay the majority of payroll taxes. FICA taxes are paid monthly or bi-weekly, and Form 941 is used to report them quarterly. A payroll program like Gusto can usually help with this automatically.
For employers, the two FICA tax rates are:
- The Social Security tax rate is 6.2 percent of an employee’s income or earnings, up to a maximum wage of $132,900 for the 2019 tax year, $128,400 for the 2018 tax year, and $127,200 for the 2017 tax year (2017 tax year).
- The Medicare tax rate is 1.45% of an employee’s income or earnings; unlike Social Security, there is no salary or wage limit.
Employers and workers each pay half of the total Social Security and Medicare taxes (FICA tax). This implies that the real Social Security and Medicare tax rates are 12.4 percent and 2.9 percent, respectively. Employers, on the other hand, are only responsible for paying half of these taxes and withholding the other half from employee paychecks.
Here are a few examples of how to figure out how much FICA tax you owe:
Example of a Social Security Tax Rate
Assume you have a year-end salary of $135,000 for your employee. Here’s how you’d figure up your portion of Social Security taxes as an employer:
$8,239.80 = $132,900 x 0.062
Because this employee’s $135,000 compensation surpassed the Social Security salary limit of $132,900, your employer portion of Social Security is 6.2 percent of $132,900, not the full $135,000 that the employee earned for the year. However, keep in mind that you must pay these taxes on a monthly or bi-monthly basis, with payments ceasing only when an employee’s annual salary reaches $132,900.
Example of Medicare Tax Rates
For Medicare, we calculated your employer contribution of Medicare based on your total income of $135,000 earned. This is because, unlike Social Security, Medicare does not have a salary/wage limit. For an employee earning $135,000 per year, here’s how you’d figure out your employer portion of Medicare taxes:
$1,957.50 = $135,000 x 0.0145
Medicare taxes must also be paid on a monthly or bi-weekly basis. Check out our FICA and Form 941 tax tutorial for step-by-step instructions on how to pay your FICA taxes and properly record payments using Form 941.
You may use a payroll service like Gusto to avoid manually paying FICA taxes and unemployment insurance. Their payroll program takes care of all elements of payroll, including paying all necessary payroll taxes automatically. You may join up for a free trial here for as low as $45 per month.
Taxes on Unemployment Insurance (FUTA & SUTA)
You must also pay unemployment insurance for each of your workers on a federal and state level as an employer. These are referred to as the Federal Unemployment Tax Act (FUTA) or the State Unemployment Tax Act (SUTA) (SUTA). These taxes are required once a year and must be submitted on Form 940; you must pay them whether or not you have a former employee receiving unemployment benefits.
An explanation of how state and federal unemployment insurance rates operate may be found below:
Unemployment Tax Rates by State
The state determines the SUTA rates for each employer. The number of workers you’ve dismissed and how many of those employees file unemployment claims determine your SUTA rates.
Between October and December, you will either get your unemployment rate by snail mail or online, depending on the method set by your state. Rates typically vary from 2.7 percent to 3.4 percent and higher. This rate will take effect on January 1st of the following year. For example, you will get a letter between October and December 2018 informing you of the new rate, which will begin on January 1, 2019.
Unemployment Tax Rates in the United States
The federal unemployment tax rate (often referred to as FUTA) is a flat 6%. Your FUTA tax is lowered to 0.6 percent if you have paid your state unemployment taxes on time. Employers in the Virgin Islands are currently exempt from this regulation. Because the Virgin Islands owe money to the federal government, employers in the territory must pay a FUTA tax of 2.4 percent.
Only the first $7,000 in earnings for each employee is subject to the FUTA tax. This would cost businesses on the Virgin Islands $168 per employee ($7,000 x 0.024). This would cost $42 per employee for businesses in the other US states and territories ($7,000 x 0.006). All employers must submit Form 940 and pay FUTA taxes once a year.
What Kind of Workers’ Compensation Insurance Do I Need?
Small companies are obliged to carry workers’ compensation insurance in addition to payroll tax requirements. Employees are covered by workers’ compensation insurance if they are injured on the job. Employers must have workers’ compensation insurance in every state except Texas.
Workers’ compensation insurance is offered and insured by private firms in most states, but other states require (or let) you purchase it from state-managed carriers. Workers’ compensation insurance premiums are often determined by industry. The greater the rate, the riskier the task.
For example, a roofer’s rate is about $21.32 for $100 in earnings, while an accountant’s rate is approximately 17 cents per $100 in wages. Rates will also vary by state.
Frequently Asked Questions (FAQs)
What Does the FICA Deduction Mean for Me?
FICA (Federal Insurance Contributions Act) is a required payroll deduction for Social Security and Medicare taxes. The Social Security tax is 6.2 percent of your salary up to $132,900 in 2019 (tax year), while the Medicare tax is 1.45 percent of your income with no upper limit.
What is the 2019 FICA Rate?
Employers’ FICA tax rate for 2019 is 7.65 percent. The Social Security tax is 6.2 percent, whereas the Medicare tax is 1.45 percent. Because employers and workers split this tax equally, the same tax rates apply to employee payroll deductions for Social Security and Medicare taxes (also known as FICA taxes).
The Bottom Line
Keeping up with new hire standards, whether you’ve just recruited your first employee or have had workers for a long, maybe daunting. One of these obligations is that you comply with and pay all applicable payroll taxes, such as FICA tax. This is something that the finest payroll software will take care of automatically.
