Being a small business owner means you are in charge of handling taxes for your employees. Before giving employees their paychecks, you are required to withhold payroll and income taxes. Knowing how to calculate payroll taxes is an important part of being a business owner.
What are payroll taxes?
Payroll taxes are one type of employment tax. They include FICA (Federal Insurance Contributions Act) and self-employment taxes. Both FICA and self-employment taxes cover Social Security and Medicare taxes.
You must withhold FICA tax from each employee’s gross wages. If you are self-employed, you must pay self-employment tax. Whether or not you owe self-employment tax depends on your business structure. Basically, if you don’t receive a salary like your employees, you must pay self-employment tax.
Income and unemployment taxes
Other types of employment taxes include:
Income taxes and unemployment taxes are not technically payroll taxes, so they will not be discussed in this article.
How to calculate payroll taxes
How are payroll taxes calculated? FICA and self-employment taxes are standard percentages. The amount to withhold from employee pay will depend on how much they earn. Learn how to figure out payroll taxes below.
FICA tax
FICA tax is an employee and employer tax, meaning you and your employee both contribute matching portions. Withhold a total of 7.65% from employee wages and pay a matching 7.65% for each employee.
The percentages are broken down by Social Security and Medicare tax. These rates are subject to change each year.
Social Security tax rate
The Social Security tax rate is 6.2% of each employee’s wages. What is the employer percentage of payroll taxes for Social Security? You will also pay 6.2% of the employee’s wages for this tax.
The 2018 Social Security wage base is $128,400. Continue withholding and contributing the Social Security tax portion until the employee earns $128,400 in 2018. After the employee earns $128,400 in gross wages, stop withholding and contributing to Social Security.
Medicare tax rate
The current Medicare tax rate is 1.45% of each employee’s wages. You must also contribute a matching 1.45%.
Unlike Social Security tax, there is no wage base limit for Medicare taxable wages. There is an additional Medicare tax of 0.9% after an employee earns above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). Only employees pay the additional Medicare tax.
Self-employment tax
Employers and employees do not share the responsibility of self-employment tax. Instead, you are responsible for paying the total amount of Social Security and Medicare taxes. Self-employment tax is also known as the Self-Employment Contributions Act (SECA) tax.
The self-employment tax rate is 15.3%. Of this percentage, 12.4% goes to Social Security and 2.9% goes to Medicare tax. After you earn $128,400 in 2018, you only pay 2.9% of your wages (for Medicare). And, you will need to pay the additional Medicare tax rate of 0.9% once you earn above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).
File Schedule SE to determine the amount of self-employment tax you should have paid during the year. Attach IRS Schedule SE to Form 1040.
Example of how to determine payroll taxes
Take a look at the following examples to understand how to calculate employer payroll taxes (FICA and SECA taxes).
FICA tax example 1
You are a sole proprietor with three employees, Employee A, B, and C. Employees get paid on a biweekly basis. Below is the amount of each employee’s gross wages.
Employee | Pay |
Employee A | $1,500.00 |
Employee B | $1,200.00 |
Employee C | $2,000.00 |
To determine each employee’s FICA tax liability, you must multiply their gross wages by 7.65%, as seen below. These are the amounts you withhold from employee wages and send to the IRS.
Employee | FICA Tax Liability |
Employee A | $1,500 X .0765 = $114.75 |
Employee B | $1,200 X .0765 = $91.80 |
Employee C | $2,000 X .0765 = $153.00 |
Now, onto calculating payroll taxes for employers. You will need to match each employee’s FICA tax liability.
| Employer FICA Tax Liability Total | $114.75 + $91.80 + $153.00 = $359.55 |
You owe $359.55 per pay period to cover all the employer portions of FICA tax. Continue paying this amount until employee wages change. These employees will not earn above the Social Security wage base limit.
FICA tax example 2
Here is an example of a highly compensated employee, Employee D. This person is your only employee. Employee D earns $10,000 biweekly.
Take a look at how much you need to withhold and send to the IRS for Employee D’s FICA tax.
| Employee D | $10,000 X .0765 = $765.00 |
Now, let’s take a look at your FICA tax liability. Since you only have one employee, you will owe the same amount as Employee D.
| Employer FICA Tax Liability Total | $765.00 |
Continue paying this amount until the employee’s wages change, they earn above the Social Security wage base, or reach the additional Medicare tax threshold.
Take a look at how FICA will work once the employee earns above $200,000. You will no longer withhold or contribute Social Security tax. Add the regular Medicare tax rate (1.45%) to the additional Medicare tax rate (0.9%). You will need to withhold a total of 2.35% for Medicare.
This is how much you will need to withhold from Employee D’s wages for FICA.
| Employee D | $10,000 X .0235 = $235.00 |
You will withhold $235 from the employee’s wages. You will contribute 1.45% of the employee’s wages, as seen below.
| Employer FICA Tax Liability Total | $10,000 X .0145 = $145.00 |
As you can see, you will withhold $235 from Employee D’s gross wages and contribute $145 for the employer portion.
SECA tax example 1
For self-employment tax, we will use a simple example. You earned $198,000 for the year. You will only apply the Social Security tax (12.4%) up to $128,400.
Let’s determine your Social Security tax liability on your first $128,400. Social Security is 12.4% of your wages up to the wage base.
| Employer SECA Tax Liability (Social Security) | $128,400 X .124 = $15,921.60 |
Now, let’s determine your Medicare tax liability on all your wages. Medicare is 2.9% of your wages.
| Employer SECA Tax Liability (Medicare) | $198,000 X .029 = $5,742.00 |
Since you do not earn above $200,000, you do not need to worry about the additional Medicare tax.
Your total SECA tax liability for 2018 would be $21,663.60 ($15,921.60 + $5,742.00).
Total payroll taxes for employers
Using FICA tax example 1 and SECA tax example 1, let’s determine the total amount of payroll taxes for the year. There are 26 biweekly pay periods in a year.
Employer FICA Tax Liability | $359.55 X 26 = $9,348.30 |
Employer SECA Tax Liability | $21,663.60 |
Total Tax Liability for Employer | $9,348.30 + $21,663.60 = $31,011.90 |
You would owe $31,011.90 for the employer portion of FICA and your SECA tax obligations.
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