-Both the Federal government and the State of California require that certain taxes be deducted from each paycheck. The payroll taxes are sometimes confusing to both employees and employers, especially new employers and Atascadero’s payroll firm, North County Tax and Accounting has taken some of the mystery out of these taxes.
Some of the bewilderment arises when both employers and employees confuse payroll taxes and payroll deductions. There are also some taxes associated with wages paid that California employers pay but do not deduct from the employee’s paycheck.
Taxes deducted from the employee’s paycheck
- Income withholding taxes for both federal and state, and sometimes local city or county taxes
- A percentage of Social Security and Medicare, collectively known as FICA (Federal Insurance Contributions Act). Employer and employee share equally in paying these taxes, each paying 6.2-percent of Social Security tax and 1.45-percent of the Medicare tax for earnings up to $137,700. An additional .9-percent Medicare tax may apply for earnings exceeding $200,000 for single filers or $250,000 for joint filers.
- California state disability insurance (SDI) is withheld for the first $122.909 in wages for a calendar year. The SDI tax rate is 1-percent of the gross pay. Meaning, if the pay is $500, the SDI deduction is $5.
While it is true that certain taxes are deducted from the employee’s paycheck, the difference is that payroll taxes are required by law. Payroll deductions are voluntary deductions that an employee authorizes to be withheld. Medical insurance and 401(k) contributions are examples of voluntary deductions.
The employer deducts state and federal income tax, FICA taxes and SDI and pays those funds to the appropriate government agency on the employee’s behalf. Paying quarterly taxes that are associated with payroll are important to avoid penalties and other problems. The Atascadero payroll firm can help make getting taxes paid on time much easier.
Taxes paid by the employer
While the employer and employee share equally in paying the FICA taxes, there are other taxes associated with employee wages for which the employer is fully responsible. These include:
- Federal unemployment (FUTA), is a tax paid by employers. The tax is 6-percent of the first $7000 in wages for each employee for a calendar year. Employers owe FUTA for any employee who has been paid at least $1500 during a calendar year.
- California employers receive a 5.4 percent FUTA tax credit because California administers a state unemployment fund in addition to FUTA, meaning California employers pay a .06 percent rate on employee earnings up to $7000
- California unemployment insurance (UI) is funded by employers who pay unemployment taxes on up to $7000 in wages paid to each employee. The tax rate varies for employer depending on the amount of UI benefits paid to former employees. The current cap is 6.3-percent. Employers in their first three years of business pay 3.4-percent that increases over time.
- California unemployment training tax (ETT) funds programs that help businesses develop the skills of workers who directly produce or deliver goods and services. The tax rate is 1-percent for the first $7000 earned by each employee.
Simplifying payroll
Getting the employee payroll deductions right and the employer tax obligations right are only part of best payroll practices.
There are laws requiring when employees are to be paid, how employees that are being laid-off or terminated are to be paid, how and when overtime is paid and how and when commissions are paid. Aside from the legal ramifications, employers want to honor their employees’ hard word by paying correctly and on time. Employees appreciate having their work and loyalty respected with timely paychecks.
Payroll is a critical operation of business and can overload small business owners who need to be focusing on building business instead of bookkeeping, accounting and getting payroll out on time. The Atascadero payroll firm, North County Tax and Accounting, provides expert payroll services for companies of all sizes. The firm’s professional services are designed to deliver reliable, cost-effective solutions to payroll challenges.
