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, there is an annual taxable limit of $128,400 for 2018. There is, however, no annual limit for Medicare.
As part of the Affordable Care Act, if your employees earn over $200,000 as a single earner or over $250,000 as a married couple, they will be required to pay an additional amount of .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 SS + 1.45% Medicare) to 8.55% (6.2% + 1.45% + .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 your W-4 filing status and allowances.
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 tax withheld using Form W–4
The amount of 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 three types of information that your employer will use to figure your withholding:
- Whether to withhold at the single rate or at the lower married rate.
- How many withholding allowances you claim. (Each allowance reduces the amount withheld.)
- Whether you want an additional amount withheld.
When using Justworks, the additional federal income tax withholding amount is applied to every paycheck. If you're a salaried employee and would like an additional $100 withheld from your paycheck each month, you should put $50 in that field.
How to adjust your withholdings in Justworks
At Justworks, you will not be required to complete a W-4, but instead we will ask for your withholding information via our enrollment process. Employees are prompted to enter their filing status and exemption information when they enroll in the system, and can make changes on their own at any time. There is a section to choose the number of allowances withheld as well as a box to enter an additional predetermined amount.
If you prefer, you can also enter the information yourself by navigating to your Account Settings and clicking Edit next to Bank & Tax Settings. 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.
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.