Employer’s Payroll Taxes
You have seen how journal entries are prepared, and how they are posted in the general ledger. The following section outlines the methods to compute payroll tax expenses. The employer pays taxes on the following wages:
- FICA taxes
- Federal Unemployment Tax
- State Unemployment Tax
Payroll taxes are the state and federal taxes that employers are required to withhold and/or pay on behalf of employees. Employers are required to withhold the State and Federal Income taxes as well as Social Security and Medicare taxes from the employees' wages. They are required to pay a matching amount of the Social Security and Medicare taxes for employees, and pay the State and Federal unemployment tax.
Each new employee has to complete the IRS form W-4. This form is used to calculate the amount of Federal Income tax to withhold from the employee's wages. The income tax structure in most states is based on the federal system. Employers use this system to calculate the amount of state income tax to withhold.
Social Security and Medicare taxes, also known as FICA taxes, must be withheld from the employees' wages. Employers must also pay a matching amount of FICA taxes for employees.
Currently, the Social Security tax rate is 6.2%. Employers are required to withhold 6.2% of an employee's wages for Social Security taxes and to pay a matching amount in Social Security taxes until the employee reaches the wage base for the year.
The wage base for Social Security tax is $97,500 for the year (in 2007). Once that amount is earned, neither the employee nor the employer owes any social security tax.
The Medicare tax rate is 1.45%. Employers must withhold 1.45% of an employee's wages and pay a matching amount for the Medicare tax. There is no wage base for the Medicare portion of the FICA tax. Both the employer and the employee always pay Medicare tax, regardless of earnings.
Employers must also pay State and Federal Unemployment Taxes (SUTA and FUTA). The FUTA rate is 6.2%. Employers can take a credit of up to 5.4% for SUTA taxes. If they are eligible for the maximum credit, their FUTA rate will be 0.8%.
The wage base for FUTA is $7,000. Employers will stop paying FUTA for each employee once his or her wages exceed $7,000 for the year. They will need to check with their state about SUTA tax rates and the wage base. Generally, the SUTA tax rate is based on the amount of unemployment claims that are filed by employees who have been terminated. If a business is new, the SUTA tax rate starts at the maximum and declines if a history of few claims is built.