Starting a new business can feel both like the most exciting and most terrifying thing you’ve ever done. On one hand, you’re finally starting a business! Perhaps you’re realizing a life-long dream of opening your own restaurant or venturing into your own business, having worked in a certain industry for however many years. Whichever camp you fall into, it can feel really liberating. On the other hand, though, you’re starting a new business. Permits, costs, regulations, hiring—all of these things take time, money, and energy. By the end, you might be left feeling burnt out.
At Payday HCM, we understand this process better than most. Not only were we once a new business, we’ve helped dozens of new clients get through those first couple of months where everything can feel just a little uncertain. As we mentioned, one thing you might be thinking about a lot is hiring and, on top of that, how much it’s gonna cost for you to hire all the people you’ll need. It raises the question: besides wages, what else do you have to pay?
In this article, we’ll go over employer taxes and what you can expect to pay beyond just an employee’s wage. Firstly, we’ll briefly go over some quick definitions just to clarify the wages we’ll discuss in this article (net vs. gross). Then, we’ll go into the different types of taxes that employers are required to pay, including:
By the time you’re finished reading this article, you’ll be an expert in all things employer taxes-related, and you’ll be ready to hit the ground running by hiring all those fresh faces.
Net vs. Gross Wages
Before we dive deep into the different taxes you’ll be expected to pay as an employer, we’ll want to understand the differences between net and gross wages.
Before And After Deductions
Gross pay is an employee’s earnings before any deductions—this includes taxes, benefits, wage attachments, or anything else that may be deducted from an employee’s pay. Net pay, then, is an employer’s actual take-home pay. This is their earnings minus any deductions, including benefits, health insurance, retirement funds, etc.
For an employee, the net pay is the important number: that’s the number that you’re actually getting paid. For employers, though, gross pay is slightly more important in terms of understanding how much your labor cost is, for example. It’s also the number we’ll be referring to throughout most of this article.
Understanding Your Cost of Labor
An employee’s gross pay is important in understanding your business’ cost of labor. According to Investopedia, a business's labor cost is best understood as the sum of wages paid to employees plus any additional costs for employee benefits and employer taxes.
This cost can then be broken down even further into direct and indirect costs. Direct costs are, as the name implies, directly associated with the cost of labor, which includes wages. Indirect costs are things that help to support labor, like the IT guy you outsource to fix all your computers. This article is going to focus on one particular element of this cost, though: employer taxes.
What Taxes Do Employers Have To Pay?
Now that we understand a bit more about wages and the cost of labor, we’ll go into what taxes you’ll be expected to pay with each paycheck.
Social Security and Medicare (FICA) Taxes
The Social Security and Medicare taxes that you’ve seen deducted from your paychecks year after year are also paid out by your employer in a matched percentage. Both of these taxes are a part of the Federal Insurance Contributions Act.
The act dates back to former President Franklin D. Roosevelt and his actions under the New Deal. According to U.S. News, the act originally only included changes to Social Security so that it would be paid by employees and employers instead of the government, with Medicare joining the FICA umbrella when it was passed into law in 1965.
These FICA taxes accumulate to a total of 15.3 percent per paycheck: 6.2 percent for Social Security and 1.45 percent for Medicare paid by the employee, and the same percentages for both Social Security and Medicare paid by the employer. The Social Security and Medicare tax rates have remained unchanged since 1990.
State Unemployment Tax
Another tax that employers have to pay is their state unemployment tax which fall under the State Unemployment Tax Act. Unlike Social Security and Medicare, SUTA taxes are paid only by the employer to fund the state’s unemployment benefits.
The amount you will pay in SUTA tax depends largely on two factors: the state you are in and whether you are a new business or not. SUTA tax rates for established businesses are determined in most states by a company’s turnover rate. The SUTA tax rate can range anywhere from 0 percent in Iowa to 20 percent in Arizona.
For new businesses, while the rate also depends on your state, the SUTA tax rate will generally sit somewhere around 1 percent. Some states also factor industry into calculating the SUTA tax rate: New Mexico, for example, uses industries to determine SUTA tax rates.
Federal Unemployment Tax
Another employer-only tax, the Federal Unemployment Tax Act requires employers to pay a federal unemployment tax in addition to the SUTA tax. The FUTA tax rate is fixed at 6 percent for all employers and must be paid by employer if they either paid out $1,500 in wages in any quarter of a calendar year or if they had one employee work twenty weeks in a calendar year.
According to the U.S. Department of Labor, the maximum an employer can expect to pay in FUTA tax is $42 per employee. Employers who also pay the SUTA tax on time can receive a credit on their FUTA tax rate of up to 5.4 percent.
Make Taxes Less Taxing
Running a business is stressful business—starting a business maybe more so. There always seems to be so much to do and so little time. Between everything else, how much the business is going to cost is always a lingering question. It can be hard to know what all of your expenses are at any given moment. Knowing exactly what to expect when it comes to thing like employer taxes can help to alleviate that stress just a little bit.
Of course, it’s possible that this article has made you want to forget that taxes exist and that math is hard. We get it: businesses have to spend their time wisely. Taking some things off of your plate can be a huge relief. One of those things? Payroll. Check out our article on the five features to look for in a payroll provider.
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