State Unemployment Insurance
There are two components to how SUI tax is calculated: "wage base” and rate.
Wage base is the maximum amount of earnings that can be taxed in a given calendar year. This is established on a per-state basis and may change from year to year.
Your SUI tax rate is determined based on how many of your former employees have filed an unemployment claim in the past. New companies are taxed at a “new employer” rate and then the rate is updated on an annual basis by the state based on unemployment claim activity. New employer rates generally range from 2-4%.
Example: You have an employee in New York. Your company’s New York SUI rate is 3% and New York’s wage base is $10,000. If you pay an employee $10,000 in a calendar year then you will be taxed $300, which is 3% of the first $10,000 that the employee earns. If the same employee earned only $5000 in a calendar year then you would be taxed $150, which is 3% of $5000.
Federal Unemployment Tax
The Federal Unemployment Tax Act (FUTA) was created to help provide funds for those that have lost their job. FUTA is paid by the employer (not taken out of an employee’s paycheck) at a tax rate of 6.2% on the first $7,000 of earned income in a given work year. Once the limit is hit, the employer is no longer taxed on that given individual.
Federal Insurance Contributions Act (FICA)
FICA (or Federal Insurance Contributions Act) is a federal tax in the U.S. that must be paid by both employees and employers in order to fund both Social Security and Medicare (programs that benefit those who are retired, disabled, or children of deceased workers). This also helps to fund the nation’s healthcare system so that healthcare can be provided for workers that are unable to attain health insurance on their own.
Through FICA, 12.4% of your employees' income will be distributed to Social Security and 2.9% will go towards Medicare. If your employees are paid an annual salary, they are only required to pay the first half (6.2%) of the annual FICA bill as your company will contribute the rest for a total of 12.4%. For Social Security, the annual taxable limit in 2019 was $132,900. That limit increased to $137,700 for 2020. There is no annual limit for Medicare, however.
As part of the Affordable Care Act, if your employees earn over $200,000 in taxable income, they will be required to pay an additional amount of 0.9% towards Medicare tax. Therefore, depending on your employees' annual income, the Social Security and Medicare taxes will range from 7.65% (6.2% for Social Security + 1.45% Medicare) to 8.55% (6.2% + 1.45% + 0.9%).
State Income Tax
Most states have their own income tax in addition to the already imposed federal income taxes. The rates will vary by state, but commonly conform to federal income taxes. When calculating your yearly federal income taxes, state income tax is allowed as a deduction.
Local Income Tax
Local income tax will vary by your specific location in any given state and can be dependent on your work location as well as your residential location. For example, anyone that earns income in New York City is required to pay an additional New York City tax in addition to their federal and state taxes. This is the case even for individuals that work in New York City, but are residents elsewhere.
Any type of earning that you receive in a year (salary, bonuses, commission, gambling winnings) will have taxes withheld and paid out to the IRS in your name. As an employee, taxes will be withheld from your paycheck by your employer and will be calculated based on the information you provided on your W-4.
For individuals that do not pay their taxes through withholdings, or those who do not pay enough that way, there will be an estimated tax imposed on you that you will need to pay. In addition to income tax, estimated tax is also used as a method to pay both self-employment tax and alternative minimum tax. Estimated tax may also apply for things such as dividends, interest, capital gains, rent, and royalties.
Determining federal income tax withheld using Form W–4
The amount of federal income tax your employer will withhold from your paycheck is dependent on two things:
- Your total annual income; and
- The information you complete on your W-4.
Form W–4 includes four pieces of information that your employer will use to compute the amount of federal income tax withholding to deduct and withhold from your pay:
- Your filing status - either “Single or Married Filing Separately”, “Married Filing Jointly” or “Head of Household”
- Whether you indicate that you are working multiple jobs
- The amount of qualified dependent credits you are claiming
- Whether you want to make other adjustments, including for: additional amount withheld for additional income (may include interest, dividends, and retirement income), additional deductions (other than the standard deduction) you expect to claim, or any extra tax you want withheld per pay period.
When using Justworks, the additional federal income tax withholding amount is applied to every paycheck. For example, if you're a salaried employee paid twice a month and would like an additional $100 withheld from your paycheck each month, you should put $50 in that field.
How to enter or adjust your withholdings in Justworks
New hire employees on Justworks will be prompted to input their W-4 information into their Justworks account. Employees are prompted to enter their filing status and complete all other steps on the form when they enroll in the system.
Employees can make changes to their withholdings at any time by navigating to the Finances tab in their Account Settings and clicking Edit next to the Tax Settings box. Keep in mind that any amount you specify under the ‘Additional Withholding Amount’ will be applied on regular salary or wage payments, but not on supplemental payments such as bonuses or commissions.
Depending on the states you live and/or work in, you may also be able to add any additional state withholdings or take advantage of reciprocal agreements.
If you’re unsure of how to set up your withholdings, you can use this Withholdings Calculator from the IRS.
How do you file all of your payroll taxes
Ok, so now you have a better idea of exactly where all your money is going. Now how do you make sure that it’s all going to the right place? Good news! If you’re a Justworks customer, we actually take care of all your payroll tax filing on your behalf. Seriously. We know this is stressful stuff and it’s a lot to keep track of for all of your employees. Let us worry about it for you. We’ll handle all of your company's quarterly payroll tax returns on your behalf. Costs are already included in your monthly Justworks fee.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.