Business Payroll Tax: Basics, Components and Calculations

For those entering the world of hiring employees and building a payroll setup, this is both an exhilarating and potentially stressful time. Hiring employees includes a number of important areas, payroll serving as just one major example, and many business owners or companies reach out to third-party professionals for assistance.

Some new businesses look for a company offering numerous payroll services among an overall HR package, including payroll tax solutions and several other distinct areas. What are the basic components of payroll taxes, how are they calculated, and what are your important responsibilities as a business owner in this area? This two-part blog series covers everything you need to know.

Payroll Tax Basics and Components

Payroll taxes refer to taxes imposed both on employees and employers. They are usually calculated as a percentage of the company's payroll and may change depending on how much an employer has paid to its employees. There are several different components to employee and employer payroll taxes:

• Social Security: The Social Security tax is used to pay the costs of benefits for elderly people, survivors of people who have died, and those who are disabled. Employers match the amount that employees contribute for this tax.
• Medicare: The Medicare tax is used to pay health care expenses for elderly people or those with disabilities. This is another matching tax where employers match what their employees pay to help fund it.
• Federal income tax: Federal income taxes are those that employees contribute from their paychecks on a regular basis. Employers, on the other hand, usually only have to withhold a portion of federal income taxes from employees' paychecks and then send it to the government on a monthly or quarterly basis.
• State/local income tax: This one is similar to federal income taxes in that both employees and employers contribute. State income taxes are used for state programs, while local taxes are used for specific purposes in the city or county where an employer is located.

These various taxes will be deducted from employee's pay, then sent to US Treasury agencies. As noted, employers must match Social Security and Medicare tax amounts, plus may have to pay into federal and state unemployment funds.

How Payroll Tax is Calculated

Certain payroll taxes, such as Social Security and Medicare, are fixed percentages for both employers and employees. Federal unemployment taxes are also fixed.

Other taxes, however, are variable. Income tax, naturally, will depend on the amount earned by the employee, plus certain other information in their Form W-4 filing.

For more on payroll taxes and how they work, or to learn about any of our HR or payroll services, speak to the staff at Affiliated HR & Payroll Services.