Trying to determine how much you'll owe in payroll taxes when you hire a new employee? Our free payroll tax calculator makes the job easy.
Adding new employees onto your staff is often a sign of progress and often a reason for excitement.
It’s likely that your business is booming enough to need the extra help, which is an accomplishment in itself. However, when making that decision to grow the workforce, there are several factors to consider beyond the search for talented candidates to fill your desired role.
One of the main factors is cost — not only the salary or wage you can afford to pay your new employee but the tax implications of adding another person onto the payroll and what payroll solutions you may need to employ.
While there are thousands of different tax laws throughout the United States between federal, state, and local policies, payroll tax rates are actually fairly simple to calculate if you know what to look for.
That’s what we’ll break down here, so you know the full cost picture of taking that next big step of adding staff to your business.
Understand What You Pay and What the Employee Pays
For every employee in your business, there is a shared responsibility for certain taxes. And though the employee is on the hook for things such as payroll and income taxes based on those federal, state, and local policies, your company has the duty to withhold those taxes on the employee’s behalf in addition to paying your own share of payroll taxes.
Here is a breakdown of what employers owe, along with the payroll tax rates associated with each.
The Federal Insurance Contributions Act, which is commonly referred to as FICA, is one area of payroll taxes in which both employers and employees contribute. FICA taxes consist of both Social Security and Medicare contributions.
Payroll tax rates can change from year-to-year, but the current FICA rates are 7.65 percent for 2021. That number is a combination of a 6.2 percent Social Security tax rate and a 1.45 percent Medicare tax rate.
That means each paycheck would withhold 6.2 percent of the employee’s gross pay for Social Security and 1.45 percent of the employee’s gross pay for Medicare. Additionally, employers would pay that same amount on top of what is withheld from the employee’s paycheck.
(Note: There is a “wage base” of $142,800 for Social Security taxes, meaning any wages beyond that figure are not subject to those taxes. For example, 6.2 percent of $142,800 is $8,853.60. So, the employer and employee would each pay a maximum of $8,853.60 even if the employee’s salary exceeded the wage base. There is no wage base for the Medicare tax, so the employer and employee would continue paying a 1.45 percent rate for the entire salary.)
The Federal Unemployment Tax Act (FUTA) funds federal unemployment insurance, while each state has its own unemployment program. The programs assist workers who lost their job for reasons out of their control (among various other qualification factors). This is a payroll tax that is solely the employer’s responsibility.
The 2021 federal unemployment tax rate is 6.0 percent per employee, though only on the first $7,000 of their taxable wages. That means an employer is on the hook for, at most, $420 per employee for the federal side. Beyond that, the employer would pay whatever state rate is required based on their location.
Put Those Calculations Into Practice
Let’s break down those calculations in a hypothetical situation. Let’s say for this example that your business is at the point where an employee addition is necessary.
Based on the job responsibilities and what you’ve learned about the salary range for prospects that would fit your opening, you’ve determined that $70,000 is a rough estimate for the new employee’s annual salary.
Using that figure, you can calculate the further cost of adding a new employee based on the current payroll tax rates we described earlier.
Social Security – $70,000 x 6.2 percent = $4,340
Medicare – $70,000 x 1.45 percent = $1,015
Federal Unemployment (capped at $7,000) – $7,000 x .6 percent = $42
Based on these figures, adding a new employee would cost the employer $5,397 per year in federal payroll taxes, not counting any further state taxes such the unemployment insurance (which typically run between 2 and 6% of wages – your state’s department of labor website will have more detailed information).
Keep It Simple
While the calculation is relatively easy to compute, it is necessary for employers doing payroll themselves to stay informed on any tax policy developments and current payroll tax rates. Naturally, things get more complicated the larger your staff becomes.
Understanding these costs is important beyond the obvious legal and financial perspectives. That knowledge will also help you make better-informed decisions during salary negotiations and other areas of your budget.
For those wanting expertise and hands-on guidance during a process as important as growing a business, Payroll Vault provides local support on tax implications as well as various other workforce management operations.