In the politically charged atmosphere during the couple of years preceding a presidential election, the topic of taxes – and payroll taxes in particular – takes center stage. It is payroll taxes that take a bite out of both employees’ paychecks and small business owners’ bottom lines.
There’s much talk about those “who don’t pay their fair share of taxes.” What most people don’t understand is what makes up payroll taxes. There are three primary taxes collected:
Income Taxes (local, state and federal). These are the taxes that are reported to the governmental agencies, generally on April 15 of each year by individuals.
Social Security and Medicare Payroll Taxes. The rate of tax ranges from 7.65% to 8.55% percent for employees (8.55% on wages in excess of $200,000) and an additional 7.65% for employers. Most people don’t know that the tax liability is shared by both employees and employers.
Unemployment Taxes. This is a tax paid by the employer and the rate is affected by the state’s money management. When a state borrows money from the federal government for unemployment funds– and does not repay it on a timely basis – the offset provided by the government on the tax is reduced. This is called a solvency surcharge, and it means there is more cost to the business owners. Payment experience and employer experience impacts the tax rate as well.
For this post we aren’t going to talk much about the Unemployment Tax because that does not impact employee’s payroll.
The difference between Income and FICA taxes
There is a big difference between the two payroll taxes.
- One, the income tax, can be reduced and offset by a variety of credits and deductions in the tax filing process. According to a report by the Joint Committee on Taxation, tax filers who made $40,000 or less during the 2014 year collectively paid no federal income tax and many even received refunds of taxes paid on their behalf from their payroll
- The second, the FICA, or Social Security and Medicare tax, requires no report filing from individuals. This tax is simply paid by the employee and the employer through payroll deductions to the governmental agency. In general terms, the FICA payroll taxes are used to fund Social Security and Medicare.
It is not the income tax that has the greatest impact on household income and financial stability. The great debate is often centered on those “who pay no taxes,” which, in reality is meant to be those who pay no income taxes. Everyone pays the FICA taxes.
Making certain that all payroll and payroll-related taxes are calculated accurately, reported and paid on a timely basis is critical for business owners. This applies to big companies and small companies. And that is the reason small business owners are smart to outsource payroll services to a reliable and knowledgeable payroll provider.
Taxes are a touchy subject and no one – not the employee, the remitting business owner, or the government agencies collecting the taxes are tolerant of errors because errors are very costly.
Don’t take the chance, contact The PayrollDepartment and eliminate the worry of payroll processing and tax remittance for your business. With offices in Brownsburg and Zionsville, owner Teresa Ray and her staff are ready to help you set the stage for a great year.
-Elaine of The Payroll Department Blog Team