When you pay an employee, you owe taxes on top of their wages. The main ones are the employer share of Social Security and Medicare, federal unemployment tax and state unemployment tax. Your payroll provider calculates and files them, but you should know what they cost before you hire.
Social Security and Medicare
As the employer, you pay 6.2% of each employee's wages for Social Security, up to an annual wage limit, and 1.45% for Medicare. Together that's 7.65%. The employee pays the same amounts through withholding, but that part comes out of their paycheck, not your budget.
Federal unemployment
Federal unemployment tax, called FUTA, is 6% of the first $7,000 each employee earns in a year. Employers who pay their state unemployment tax on time usually get a credit of up to 5.4%, which brings the rate down to 0.6%. That's $42 per employee per year at most. In a few states the credit is smaller, so your payroll provider will tell you the real number.
State unemployment
State unemployment tax varies a lot. Each state sets its own wage base and rates, and new employers usually start at a set rate that changes as the business builds a history. Some states and cities also have their own payroll taxes. Your payroll provider and CPA know the rules where you operate.
A made-up example
Say you hire a medical assistant at $4,000 a month. Your share of Social Security and Medicare is 7.65%, or $306 a month. Federal unemployment adds up to $42 for the year, mostly in the first months. State unemployment depends on your state's rate. Add workers' comp, which is insurance rather than a tax, and any benefits. This post shows the full cost of a hire.
How it shows up in your books
- Wages go to a payroll expense account.
- Your employer taxes go to their own payroll tax expense account, so you can see them.
- Taxes withheld from the employee's check are a liability until your payroll provider pays them to the government. They're the employee's money, held by you.
Your bookkeeper records payroll from your provider's reports each month and checks that the liabilities clear to zero. This post covers keeping payroll funded.
Don't let deposits slip
Withheld taxes that don't get deposited on time bring steep penalties, and owners can be held personally responsible. Let your payroll provider handle deposits and filings, and keep enough in the account on each pay date.
What I'd do this week
- Pull last month's payroll register and find the employer tax total.
- Check that employer taxes have their own account in your books.
- Confirm with your payroll provider that deposits and quarterly filings are on autopilot.
- Ask your CPA about any state or city payroll taxes where you operate.
Common questions
Do I pay payroll taxes on contractors?
Generally no, but the rules for who counts as a contractor are specific. Talk to your CPA or an employment attorney before you decide.
Is workers' comp a payroll tax?
No. It's insurance, though most states require it once you have employees. The premium is usually based on payroll.
If I'm an S corp, do I pay these on my own salary?
Yes. Your salary through payroll carries the same employer taxes. Your CPA can show you how that fits your S corp math.
Want payroll recorded right every month?
We reconcile every account every month and send your P&L and Balance Sheet by the 15th, so decisions like this start from real numbers. If that's what you need, apply to work with us.