How much does an employee actually cost? Well, I can tell you this – it’s more than their annual salary.
Sure, we can look at things like overhead, the cost of parking, how much you pay for benefit programs etc. But even if you don’t have any of those things – you do have payroll. And that means payroll taxes. And there’s more to payroll taxes than income tax. And besides, that’s paid by the employee. But there are a number of other taxes that apply. Some paid by the employer, some split between the company and the employee
Let’s start with the federal tax load.
Social Security and Medicare are two of the biggies. Social Security is split between both employer and employee. And the rate is the same for both sides. You have to pay 6.2% of the gross wages, up to a maximum wage of $147K.
Medicare on the other hand is at 1.45% of wages, and doesn’t have a maximum. Additionally, for anyone who hits $200K in wages, there’s an additional Medicare tax of 0.9%. The good news – if you can call it good news – is the additional medicare tax is only paid by the employee, so the company doesn’t have to chip in at all.
“…Do not, ever, give an employee advice on what to claim etc. These are their taxes, and if they get screwed up because you gave them advice – you will be in the soup.“
Now we move on to the joy that is unemployment. Unemployment is paid solely by the employer. And the fun part is there are two – one is federal, it’s call FUTA and the other is state based, it’s called SUTA. The Federal side is usually between 5.4% up to 6% – depending on a number of complicated factors I’m not even going to go into. Just know that the rate is set each year – so be sure to double check. The good news is you only owe FUTA on the first $7K of wages for each employee, so beyond that, FUTA stops.
The state side is a different beast altogether. First off, state unemployment rates are set at the state level – so you have to check with your state. Again, they’ll notify you of your rate each year. That’s one of many reasons you have to be sure to register as an employer in the states where you have employees. Even more important now that people are remoting from any and every-where. Also, your state will set the maximum amount of wages that apply to the tax. So again, be on the lookout for that notice.
And since we’re talking about states, let’s look at some of the state based taxes. Some states have state based disability programs. We do here in California. For us both the employee and employer kick in on this tax. Each side pays 0.9% of wages up to a maximum of appx. $113K. A quick note here – all of these are current rates and maximums. So be sure to check on the most up to date rates and maximums before you run a payroll cycle.
And don’t forget, different states may have other taxes they apply. For instance, if the state has a Paid Family Leave program, generally those are taxes the employee pays alone. But in California we also have a state Education and Training tax – and that one’s paid by the employer only.
Also, some cities and counties have local taxes – New York is a good example of that.
So, one of your employees just told you that she’s pregnant. Feeling overwhelmed, with no idea where to start? After all, HR just got dumped on your plate. It’s not your zone of genius, and you don’t want it to be.
Managing California Leave is your answer. It’s an easy to understand course, that explains what the various leave programs are – without the HR gobbledy gook. And it gives you a clear step by step guide that walks you through the process of putting someone on leave
Yep, you get all the forms, notices and documents too. Everything you need to do it right and do it fast. After all, you don’t have all day – you have other things to do!
Use the link to get an Insider’s sneak peek And don’t worry – you’ve got this. And we’ve got you.
And then there are deductions that come from the employee’s pay for things like medical insurance and other benefits. Retirement plan contributions, flexible spending plans etc. Now, generally these deductions are pre tax, meaning they aren’t part of the calculation when you figure out how much taxes will be paid. But one really important point – you have to thoroughly check on each one. Retirement plan contributions for instance still count in the calculations for Social Security and Medicare. Many people, both employees and employers alike, misunderstand this piece. Generally when you contribute to a retirement account you don’t have to pay income tax on that amount – but social security and Medicare taxes still apply.
A couple of important final points on taxes. If you have an employee that claims exempt from tax withholding on their W-4, that only makes them exempt from federal income tax. Social Security and Medicare will still apply. And, unless they also claim exemption from income tax on their state withholding form, then state income taxes would also still apply.
And, if someone does claim tax exemption status – they have to do a new form every year. That’s right – your records have to show a new federal or state withholding form for each year they claim exemption. So be sure to put a tickler in your calendar.
By the way – one quick pro tip. Do not, ever, give an employee advice on what to claim etc. These are their taxes, and if they get screwed up because you gave them advice – you will be in the soup. Just refer them to their financial adviser or accountant.
Now before you decide to bag the whole thought putting people on payroll, and just go the full independent contractor route. Be very careful here. The states have continued to be explicit around what is and what isn’t an independent contractor. And if you get it wrong, you can find yourself with all sorts of fines and penalties – and you might even get hit with both sides of those payroll taxes that are usually split between the employee and employer. So definitely get professional advice before you move forward.
Taxes Cheat Sheet: