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Understanding Payroll Taxes

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Once you hire staff, you must start paying payroll taxes for each individual hired on. Payroll taxes include federal income, Social Security and Medicare. Depending on where your business is, this may also include state and city taxes.

Before paying taxes, all businesses must acquire a Federal Employer Identification Number (EIN) from the US government. Once a business has an EIN, they can file payroll taxes with the government. Employers are required to withhold the full amount of federal income tax. Employers are also required to withhold half of the Social Security tax and half of the Medicare tax from each employee’s pay check, and pay the remaining half of Social Security and Medicare taxes themselves.

  • Unemployment Tax

    In addition to the payroll taxes listed above, employers must pay an unemployment tax for each individual that works at the company. This is called State and Federal Unemployment Taxes (SUTA and FUTA). The tax rate for FUTA is 6.2%, and based on the first $7,000 paid in wages to each employee during the year. Employers who pay their SUTA on a timely basis receive an offset credit of up to 5.4%. SUTA taxes vary by state.

  • Federal Income Tax

    To figure out federal taxes, employers should have employees fill out a mandatory IRS W-4 form. This form is used to figure out federal taxes, and state and city taxes where applicable. To calculate total federal tax, use the employee's W-4, Employer's Tax Guide and Supplemental Employer's Tax Guide.

  • Social Security Tax

    Social Security tax makes up one half of FICA (Federal Insurance Contributions Act). The tax rate for Social Security during 2008 is 6.2% of each employee’s salary, with the employer paying a matching amount. Both the employer and employee are only responsible for a limited amount of Social Security tax. This amount is paid for anything earned up to a wage base of $102,000 for the year 2008.

  • Medicare Tax

    The other half of FICA is Medicare. Employers must withhold 1.45% of each employee's salary for the Medicare tax. In addition, employers must pay a matching amount.

  • State Income Tax

    Depending on the state where a business is located, employers and employees may be required to pay state income tax. Taxes vary by state.

  • City and County Income Tax

    Though there aren’t many cities or counties with an income tax, a few, like New York City, do have this tax. Check with the local government to see if there is an applicable local tax.
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