With the multiple payroll tax obligations you have as an employer, it can be difficult to understand what the Internal Revenue Service (IRS) expects of you. This is especially true when it comes to withholding and paying FICA and FUTA taxes. Many employers find these tax obligations more challenging to understand than basic federal and state income tax withholding. We provide a description of each tax type below along with more of what you need to know to ensure that you’re meeting your obligations as an employer.
Federal Insurance Contributions Act (FICA)
The federal government established FICA as part of its Social Security program in the 1930s. It created the name Federal Insurance Contributions Act in 1939, and people still see the abbreviation FICA on their paychecks today. Although the IRS collects the funds, the Social Security Administration (SSA) disburses them.
The government requires all employed people to pay FICA taxes, whether they work for an employer or for themselves. As an employer, you must withhold 7.65 percent of an employee’s wages per pay cycle to cover the 6.2 percent for Social Security and 1.45 percent to fund the federal Medicare program. You must also remit 7.65 percent per employee yourself, bringing the total contribution for each employee to Social Security and Medicare to 15.3 percent. This is the amount for 2019, which can change from one year to the next.
Federal Unemployment Tax (FUTA)
The federal government requires employers to pay into a fund abbreviated FUTA, which stands for Federal Unemployment Tax. This fund helps to pay benefits to employees who lose their job through no fault of their own. Your state government may also require payment into a local unemployment fund. If so, this coordinates with the FUTA program. In addition to making payments to the federal government, you must complete and submit a report of your payments using the Employer’s Annual Federal Unemployment Tax Return. This is Form 940.
When you register for an Employer Identification Number (EIN), it alerts the federal government to expect FUTA payments. You must pay this tax if your company meets these qualifications:
- Payment of wages to employees exceeding $1,500 per quarter.
- Your business utilizes the services of one or more employees for at least a portion of the day 20 or more weeks per year. This includes full-time, part-time, and temporary workers but doesn’t include independent contractors.
If your business meets these qualifications, it must pay six percent FUTA tax on the first $7,000 of earnings for every employee. However, this tax payment only applies to earned income and not an employee benefit such as health insurance or retirement accounts.
Need More Clarification or Advice?
Doerhoff & Associates CPA works with small business owners just like you every day to help them achieve the most advantageous tax situation. We invite you to contact us to learn more about our services or to request a consultation.
