Employment Taxes Made Simple for Small Business Owners

Employment Taxes. Just hearing those words might make your shoulders slump, and your eyes glaze over. 

We get it—employment taxes aren’t exactly the highlight of owning a small business. It’s probably the same look your new hire gives when you hand them a W-4. 

If we asked you to list the top 10 reasons you love running your business, employment taxes likely wouldn’t make the cut. Employment taxes can be overwhelming, but a basic understanding can help an employer avoid significant penalties and late fees. 

So save the “glaze” for the donuts and let’s look at some of the basics every small business owner needs to know. 

What Are Employment Taxes?

In simple terms, employment taxes are the taxes withheld from your employees' paychecks for federal, and when applicable, state and local income taxes. 

This also includes the employees’ portion of Social Security and Medicare taxes (FICA). On top of that, employers are responsible for paying their share of FICA and contributing to federal and state unemployment taxes.

As an employer, it’s your responsibility to withhold, deposit, and report these taxes for both yourself and your employees, typically on a quarterly basis. However, keep in mind that some state and local schedules might differ.

A Closer Look at Employment Taxes

Let’s break down the main types of employment taxes and what they mean for your business.

Federal Income Tax

Federal income tax is based on an employee’s taxable compensation and is applied toward their federal tax liability. The amount you withhold is determined by the information your employee provides on their W-4 form.

Every employee must submit a completed W-4 so you can calculate the correct tax withholding.

Federal Insurance Contributions Act (FICA) Taxes

FICA taxes include Social Security and Medicare. 

Social Security

The current tax rate for Social Security is 6.2% for the employee and 6.2% for the employer.

For 2024, the wage base limit for Social Security is $168,600. This means any wages earned over $168,600 are not subject to Social Security tax for that year.

Medicare

The current tax rate for Medicare is 1.45% for the employee and 1.45% for the employer. 

Medicare has no wage base limit, meaning all covered wages are subject to the Medicare tax for both the employee and employer.

Additionally, there is a Medicare tax of 0.9% for wages exceeding a threshold (based on the taxpayer’s filing status), but this only impacts the employee. In other words, the employer does not need to match this amount.

For 2024, the threshold is $200,000 for single filers. While the tax is paid by the employee, the employer is required to withhold, deposit, and report the tax on behalf of the employee.

State and Local Income Tax

Most states require employers to withhold state income taxes, but there are exceptions. As of 2024, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don't have a state income tax. 

In some areas, local income taxes may also apply, and these can vary based on city, county, or school district.

Federal Unemployment Tax Act (FUTA)

The FUTA tax helps to fund state unemployment systems by providing unemployment compensation for workers who have lost their jobs. 

The FUTA tax rate is 6% of the first $7,000 from each employee's annual wages (after subtracting any payments exempt from FUTA tax). 

FUTA taxes are only paid by the employer and there is no deduction from the employee's wages. 

In some states, employers may qualify for a federal tax credit of up to 5.4%, which can lower their FUTA rate as low as 0.6%.

A state that has borrowed from the federal government to cover unemployment benefits and has not repaid the funds is referred to as a “credit reduction state”. Employers in these states will have a reduced credit resulting in a higher FUTA tax if they paid their unemployment taxes in a timely manner.

State Unemployment Tax (SUTA)

SUTA, also referred to as State Unemployment Insurance (SUI), helps fund unemployment benefits for workers who have lost their jobs.

SUTA tax rates vary by state and may change each year. Employers pay SUTA tax based on their state’s wage base limit, which is the maximum threshold for which SUTA taxes can be withheld. 

In most states, only the employer pays SUTA, but a few states also require employee contributions. The SUTA tax rate is determined by the employer’s claims experience, and employers receive notice of their rate either quarterly or annually, depending on state regulations.

What Are the Employment Tax Requirements for Business Owners?

If you’re still reading this, take a deep breath and pat yourself on the back—understanding employment taxes is no small feat! 

Now that we have a general overview of employment taxes, we will look at what this means for the employer. Employers are required to calculate withholdings, deposit the taxes, and file accurate and timely returns. Getting this right means avoiding penalties and late fees.

1. Calculate Withholdings

Your first step is to calculate withholdings based on each employee's Form W-4 or state withholding certificate. 

In the absence of a W-4, an employer should withhold as though the employee is single with no adjustments. The IRS offers tax tables in Publication 15 (Circular E) that can guide you through this process. 

If you are handling your payroll in-house, there are many software options that will calculate these taxes based on the current IRS tables. If your payroll is outsourced to a payroll provider, they will calculate the withholdings for you. 

Hint Hint, one of those options sounds better than the others

2. Filing Tax Returns and Depositing Withholdings

Calculating the taxes is just the beginning. The employer is also required to file tax returns reporting the withholdings and deposit the taxes according to set deadlines.

The list below is not intended to be comprehensive, but rather a brief overview of some of the most common reports required for small business owners.

​​Form 941 is the Employer’s Quarterly Federal Tax Return reporting the employee’s federal income tax withholding, Social Security and Medicare Tax withholdings, and the employer’s share of the Social Security and Medicare taxes.

Form 944 is the Employer’s Annual Federal Tax Return for small employers whose annual liability for Social Security, Medicare, and federal income tax withholdings is $1,000 or less. This form allows you to file and pay these taxes once a year instead of every quarter.

Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return.

In addition to these reports, employers are required to report withholdings to employees and to the Social Security Administration annually. Those reports are made using Form W-2 and Form W-3.

State income tax and SUTA reporting requirements and deadlines vary by state. Contact your local taxing authority (Department of Revenue or Finance) for this information.

How to Comply with Employment Tax Deposit Requirements

Employment taxes are deposited with the government based on a schedule determined by the IRS. The frequency with which employers are required to deposit is dependent on their annual taxes. Some employers are required to deposit on a monthly schedule, while others deposit on a semi-weekly schedule.

Federal deposits are made electronically through the Electronic Federal Tax Payment System, EFTPS. State and local entities have their own deposit requirements. Contact your local taxing authority for payment deadlines and options.

Struggling with Employment Taxes? Maybe It’s Time to Outsource

Are you still with me, or have you flatlined? Yes, there’s a lot to take in when it comes to employment taxes. It’s easy to get lost in the details and worry about making a mistake.Whether you’re managing payroll on your own or already outsourcing, it’s important to understand the basic requirements—no one wants to lose money to penalties or late fees!

 But here’s the good news: you don’t have to do it alone.

The biggest advantage of outsourcing to a payroll provider like Whirks is that we do the heavy lifting for you. A payroll provider stays on top of ever-changing regulations, ensuring your tax withholdings are calculated correctly, reported accurately, and deposited on time. Plus, we take care of tax notices, freeing up your time to focus on what really matters—growing your business.

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