As a small business owner, calculating payroll taxes is crucial for supporting government programs like Social Security and Medicare, which provide benefits to employees during retirement or healthcare needs. To determine these taxes, I first identify the taxable wages for my employees and calculate the appropriate withholdings from their paychecks. For instance, if an employee earns $3,000, I would deduct federal income tax, Social Security tax at 6.2%, and Medicare tax at 1.45%. By accurately calculating payroll taxes, I ensure compliance with tax regulations while effectively managing my business finances. This approach helps me avoid penalties and guarantees that my employees receive their rightful benefits
In this article, we will provide a simple guide on payroll taxes, making it easy for you to understand everything you need to know without needing to look elsewhere.
How to Calculate Payroll Taxes for Small Businesses
To calculate small business payroll taxes, you need to use the correct rates and know who is responsible for paying the taxes and which earnings are taxable.
Determine who is subject to the taxes
Employers only pay payroll taxes for employees, not independent contractors, and employees are usually those whose work is managed by the employer in terms of what they do and how they do it.
Verify taxable wages
Some employee earnings, like reimbursements for expenses and gifts that aren’t cash, aren’t taxed, and employers need to consider pre-tax benefits and wage limits before taking out taxes.
Withholding small business payroll taxes
FICA taxes and some state SUTA taxes are taken from employee wages, so employers must first figure out each employee’s total taxable earnings; for example, if an employee earns $550 in a pay period, their Medicare tax would be $7.98 (calculated as $550 x 1.45%).
Payroll tax compliance
FICA taxes are trust fund taxes taken from employee wages and held by employers until paid to the government, and failing to pay them can result in serious penalties; a violation happens when responsible individuals knowingly ignore their duty to pay these taxes.
Types of small business payroll taxes
Small businesses face a variety of payroll taxes, which are essential for funding various government programs. Here’s a breakdown of the common types.
1 Federal Income Tax:
Federal tax brackets tell you how much tax you must pay on different parts of your income after subtracting deductions from your total earnings.
Single filer’s tax brackets for the tax year 2025
Married tax brackets for tax year 2025
2 Social Security Tax:
As we get closer to 2025, the income subject to Social Security tax will rise to $176,100, up from $168,600 in 2024. This means businesses with employees who earn a lot of money may need to budget for higher payroll expenses.
In 2025, employees will pay:
- 6.2% Social Security tax on wages up to $176,100 (maximum tax of $10,918.20)
- 1.45% Medicare tax on wages up to $200,000 ($250,000 for joint filers, $125,000 for married filing separately)
- 2.35% Medicare tax on all wages above $200,000 ($250,000 for joint returns, $125,000 for married filing separately)
Self-employment workers will pay:
- 12.4% Social Security tax on the first $176,100 of income (maximum tax of $21,836.40)
- 2.9% Medicare tax on income up to $200,000 ($250,000 combined income for joint returns, $125,000 for married filing separately)
- 3.8% Medicare tax (2.9% + 0.9% additional tax) on income exceeding $200,000 ($250,000 combined income for joint returns, $125,000 for married filing separately)
3 Federal Unemployment Tax (FUTA)
FUTA Works
Employers have to pay a tax if they pay an employee more than $1,500 in three months, but this tax only applies to the first $7,000 of that employee’s earnings.
If an employer pays an employee $1,500 or more in one quarter, they must pay a 6.0% FUTA tax for the whole year, but they can lower this by up to 5.4% if they also pay state unemployment taxes.
Calculate FUTA Tax
FUTA taxes are based on the first $7,000 of what each employee earns, including pay and bonuses, and anything over that amount isn’t taxed.
Certain payments might not be taxed under FUTA based on state rules, and the employer pays this tax without taking it from employee paychecks.
Calculation
At Company XYZ, with ten employees each making $10,000 a year, the FUTA tax only applies to the first $7,000 of their pay.Company XYZ will pay $4,200 in FUTA tax each year, based on 6% of $7,000 for each of its 10 employees, plus any state unemployment taxes.
4 Self-employment tax rate (SECA)
The Self-Employed Contributions Act (SECA) tax means that self-employed people must pay a total of 15.3% in taxes, which includes both the employer’s and the employee’s share for Social Security and Medicare.
The SECA tax is calculated on a self-employed person’s net earnings (which is their total income minus business expenses) and only applies to the first $168,600 they earn, leading to a maximum Social Security tax of $20,906.40 for 2024.
The Medicare tax is 2.9% with no income limits, making the total SECA tax 15.3% (12.4% for Social Security and 2.9% for Medicare); for example, if Hector earns $100,000 as self-employed, he would pay $15,300 in SECA taxes.
5 State and local taxes
As of January 1, 2025, nine states in the U.S. — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not impose a state income tax, with New Hampshire set to eliminate its tax on dividends and interest by the end of the year.
State and local taxes are typically lower than federal income taxes and vary by location, still, taxpayers can deduct the amount they paid in state income tax on their federal tax returns.
Hector’s Bakery in California faces one of the highest state income tax rates in the country, which ranges from 1% to 12.3% across nine tax brackets, and taxpayers must adjust their gross income by considering deductions and credits to calculate their state income tax owed.
Payroll Tax Payment Schedule
Employers need to take certain taxes out of employees’ pay and send them to the government while adding their contributions.
Handling payroll taxes can be tricky, and errors or missed deadlines can result in costly penalties.
We guide you on when payroll taxes are due and how to file them properly.
The due dates for federal payroll tax deposits, including income and FICA taxes, depend on your total tax liability during a specific lookback period, determining whether you follow a monthly or semiweekly deposit schedule.
Monthly tax deposit
If you owe $50,000 or less in taxes during the lookback period, you need to pay your payroll taxes by the 15th of the next month after they were taken out. For example, if you took out taxes in January, you would need to pay them by February 15.
Semi-weekly tax deposit
If you owe more than $50,000 in taxes during the lookback period, you need to pay your payroll taxes within three business days after each pay period. If you pay employees on Wednesday, Thursday, or Friday, you’ll need to deposit by the following Wednesday. If you pay them on Saturday, Sunday, Monday, or Tuesday, the deposit is due by the following Friday.
Next-day tax deposit
If you take out $100,000 or more in income and FICA taxes on any day, you need to pay those taxes by the next business day, no matter if you pay your employees monthly or every week.
How to Pay Unpaid Business Payroll Taxes
If your business owes back payroll taxes, don’t panic. Many companies deal with this problem every year. While not paying your taxes can lead to serious penalties from the IRS, there are ways to fix the situation and get your business back on track.
You have different ways to pay back unpaid payroll taxes, and the option you choose can have a big impact on your business in the future.
- Ignore the problem. Some people try to ignore their payroll tax issues, but the IRS will not forget about them.
- File an extension. You might be able to get an extra 60 days to pay your payroll taxes, depending on your situation.
- Wait for cash flow. It might be tempting to wait until your business has more money to pay taxes but keep in mind that late fees and interest will keep adding up.
- Reach out to the IRS. Contacting the IRS can help you start the payment process, but doing it alone might not get you the best outcome.
- Work with a tax firm. Hiring a knowledgeable tax firm to talk to the IRS for you can help protect your interests and offer better solutions for paying your taxes.
Common Payroll Tax Mistakes to Avoid
Today, we’ll cover the most common payroll mistakes made by HR professionals and small business owners, along with tips on how to avoid them.
Misclassifying Employees
One common payroll mistake is wrongly labeling employees as independent contractors. This can cause big legal and financial problems, so it’s important to classify all workers correctly following IRS rules.
Incorrect Calculation of Overtime Pay
Another common payroll mistake is getting overtime pay wrong. This may result in legal complications and expensive lawsuits. To avoid this, make sure to classify employees properly and pay them 1.5 times their regular hourly rate for any hours worked over 40 in a week.
Failing to Comply with Tax Withholding & Filing:
If you don’t follow the rules for tax withholding and filing, you could face big penalties and interest charges. It’s important to take out the right amount of taxes from employee paychecks and to file payroll tax returns on time.
Incomplete or Disorganized Payroll Data
Messy payroll data can lead to mistakes and take a lot of time to fix. To avoid this, it’s important to organize how you collect and store data, and using automated payroll systems can help keep your records accurate and efficient.
Final Thought
Payroll taxes are a vital part of running your business, and understanding them can save you time and money. Start by accurately calculating each employee’s gross pay, then determine the appropriate withholding taxes based on their W-4 forms. Don’t forget to include FICA taxes for Social Security and Medicare, as well as unemployment taxes. Keeping meticulous records will help you avoid costly mistakes and penalties. By mastering these calculations, you’ll ensure compliance and foster a healthy financial future for your business.
