Let’s continue the second segment of the payroll process, which involves paying taxes. I guess the question on your mind is why do employers go through the process of paying employees and paying taxes for them? The answer is simple, it’s because you are doing the right thing for both the employee and yourself (the employer). I seen many employers that bypass this entire step and simply pay the employee cash without deducting any taxes. This may be a simple way to pay your employees, but if I’m the employee I would not work for an employer that’s only paying me cash. Here are my reasoning:
1. If the employer doesn’t deduct any of the taxes, the employee will be responsilble to pay for all his or her own taxes in April which means that taxes will be owed and you may have to cough up a larger amount during that time. I prefer to pay my taxes throughout the year, so that way I know it will reduce my tax liability during April.
2. If the employee is unemployed for whatever reason, the employee can not collect unemployment benefits because the employer has not paid any of the Federal Unemployment Tax (FUTA) or State Unemployment Tax (SUI). These are actually employer taxes, so it doesn’t get deducted from the employees checks in most states. It’s one of the best benefits for working for a company that gives you a paycheck with the tax deductions.
3. If the employee retires and assuming the Social Security Funds will still be available, he or she can not claim any of it because the Employer hasn’t been paying any of those funds while the employee was employed. Remember Social Security and Medicare are paid by the employees and the employers.
The next time you want to pay the employee cash only without deducting taxes, you may want to reconsider because the employee really ends up losing in the long run. All these taxes deducted are really to benefit them and it’s also a way of thanking your employees for their service while they’ve been employed with you.
Let’s get back on track here and let me explain to you what are payroll taxes? The following taxes will be covered here:
- Federal Withholding
- Social Security (FICA, OASDI)
- Medicare
- State Withholding
- Other State Taxes
- Federal Unemployment
- State Unemployment
Federal Withholding – This amount shown on the paystub reflects what the individual employee claims on the W-4 form which includes the marital status, number of allowances, income, and pay frequency. There are no fix rates here, so all the employees that have different allowances will have a different amount deducted on their paychecks.
Social Security – It’s also known as FICA or OASDI, this tax is taken out at a 6.2% rate, the employee pays this portion and the employer matches that rate.
Medicare – It’s also a fixed rate required by the federal government, which is tax at a 1.45% rate. The employee and employer pays that amount.
State Withholding – Similar to the Federal taxes. It varies based on the marital status and number of exemptions from each employee and projected annual income. Only nine states do not have a state withholding tax, which includes AK, FL, NH, NV, TN, TX, SD, WA, and WY.
Federal Unemployment Tax Act (FUTA) – This benefit provides payments of unemployment of compensation to workers who lost their jobs. The FUTA tax rate is usually 0.8% and is based on the first $7000 in wages per employee; therefore, the maximum tax liability for each empployee would be $56.00.
State Unemployment Insurance (SUI) – This is similar to the FUTA, but the state controls this portion of it. The state funds unemployment through this tax and is usually paid by the employer; however, some states such as Pennsylvania and New Jersey also require the employees contribute to this tax.
There may also be other state taxes or local taxes within your county, city, or jurisdication, so please check with local government to determine if there are any other taxes that needs to be paid.
I’ll cover the second segment on paying taxes next time. Thank you for reading.
Payroll Tips & Advice 