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All your payrolls will have a few components in common.
For instance, a salary or rate of pay, federal taxes, state and local taxes, contributions towards Federal Insurance Contributions Act (FICA), Federal Unemployment Taxes (FUTA) and State Unemployment Taxes (SUTA).
But there are also certain optional elements – workers compensation, healthcare contributions, etc. and the requirements for which vary based on your state.
In this post, we’ll cover the six basic components of any payroll, as it is a good thing to have an understanding of all your payroll related expenses.
Salary or Wages
What is a salaried employee? A salary (otherwise referred to as wages, earnings or more formally, as remuneration) is a fixed, regular payment made by an employer to an employee. Salaried employees are typically paid out on a monthly or bi-weekly payroll frequency.
When looking at the difference between salary and wages among your employees, professionals, managers, and many office workers are usually paid a salaried amount, reflected as an annual sum. Whereas contractors and other workers are usually paid by the hour.
Your employees should ideally make minimum wages and are eligible for minimum wages, irrespective of the employment status i.e. full-time, part-time, etc or rate of payment i.e. salaried, hourly, commission, etc. There are some jobs that are exempt from the minimum wage requirements, but for the most part, employers are required to be compliant with minimum wage requirements on each payroll.
Federal Income Tax
The Federal Income Tax is a pay-as-you-go tax, and it is the money that is owed to the U.S. Federal Government. And unless you hire contractors, it is the employer’s responsibility to withhold and pay Federal Income Tax for your employees.
The amount of income tax that is withheld depends on two things:
- Your employee’s gross earnings for the job, and
- The information your employee provides on the Form W-4 i.e. whether you should be withholding at a single rate or at a lower married rate, how many allowances they claim and whether or not your employee wants additional amounts withheld per pay period.
For more information on this, you should check out our blog post about setting your employees up for payroll.
State and Local Income Taxes
In addition to the taxes paid at the Federal level, a majority of the U.S. states also have a state-specific personal income tax, and these state tax rules vary.
All the states, including the ones who have no income tax e.g. Alaska, South Dakota, etc., have a state taxing authority. You can find your state-specific government website here.
As the employer, you have to register with your state to get your state withholding account number, which is the information that most payroll providers will require if they have to remit taxes on your behalf.
Federal Unemployment Income Tax (FUTA)
FUTA is an employment tax that is only paid by the employer, but it is based on each employee’s wages or salary. To reiterate, employees DO NOT PAY FUTA taxes.
You owe Federal Unemployment Taxes if you paid at least $1,500 in wages during any calendar quarter in the current or previous year.
The FUTA rate is 6.0% and employers can take a credit of up to 5.4% of taxable income if they pay State Unemployment Taxes. And most states have their own State Unemployment Insurance Tax Act (SUTA or SUI), and if you qualify for the highest credit, then the minimum FUTA rate is 0.6%.
Related: What You Need to Know About Payroll Tax Deadlines
State Unemployment Income Tax (SUTA or SUI)
As the employer, you are also responsible for paying state-level unemployment insurance premiums based on your employee’s gross pay. Just as the FUTA, the SUTA or SUI is also an employer specific tax only and is based on each employee’s wages or salary.
Each state has a schedule for unemployment insurance rates based on the size of your company, your industry, any history of unemployment claims.
After you register with your state for an Unemployment account number, you will receive a state rate notice with the current rate that applies to your company. It is your responsibility to ensure that your payroll provider is always using the most current rate you provide them.
Federal Insurance Contributions Act (FICA)
FICA refers to the combination of the Social Security Tax and Medicare Tax, and the employer is responsible for remitting both the employer and employee contributions for coverage under the U.S. Social Security system.
As per the IRS, the Social Security Tax rate is 6.2% each for the employee and employer, which is the same rate as 2014. The social security wage base limit is $118,500.
The Medicare tax rate is 1.45% each for the employee and employer, also unchanged from last year. There is no wage base limit for this tax.
Key Takeaways:
- There are six basic components to any payroll – Salary / Wages, Federal income tax, State & Local income tax, FUTA, SUTA and FICA.
- While a majority of states impose state-level income tax, there are a few that don’t. It is recommended that you contact the tax authority in your state to determine whether or not you need to pay state-level / local income taxes.
- FUTA and SUTA are an employer-ONLY tax, but it is based on each employee’s wages or salaries.
For more information like this, you should check out our free Comprehensive Guide to Hiring your First Employee, that covers everything from the differences between employees and contractors to workers compensation, why you need healthcare and so much more!
