Employment Taxes
Employees cost you more than just salary.
You also have to pay federal taxes on a percentage of each employee’s wages.
For each employee you have, you will have to pay federal tax for:
Social Security
Medicare
Federal unemployment insurance
Social Security and Medicare
Many people refer to Social Security and Medicare taxes as FICA taxes because the taxes come from the Federal Insurance Contributions Act (FICA).1
For Social Security, you (the employer) must pay a tax equal to 6.2 percent of the employee’s income.
The good news is that you only pay Social Security tax up to a certain dollar amount of each employee’s income.2 Each year, the Social Security Administration announces this upper limit, known as the “Social Security wage base.”
The 2013 wage base was $113,700. Thus, the most you could pay in Social Security tax for each employee in 2013 was $7,049.40 (6.2 percent x $113,700).3
For Medicare, you pay a tax equal to 1.45 percent of the employee’s income. There is no upper limit on this tax. As your employee’s wages increase, so do your Medicare taxes.4
Employees Also Pay FICA (and More)
Your employees must pay Social Security and Medicare tax in an amount equal to what you must pay.5
You must withhold this matching amount from each employee’s wages.6
If your employee earns more than $200,000, you withhold an additional 0.9 percent from his or her salary for Medicare. (You withhold the extra 0.9 percent only on the amounts in excess of $200,000.)7
Federal Unemployment Act (FUTA) tax
Unemployment tax, or FUTA, is a tax equal to 6 percent of the employee’s wages.8 Fortunately, like the Social Security tax, FUTA also has an upper limit.
The cap for FUTA is the first $7,000 of each employee’s income.9 Thus, the maximum FUTA tax you could pay per employee is $420.
Additionally, if your state requires you to pay money toward a state unemployment program, you get a tax credit to reduce your FUTA tax even further.10
The credit could eliminate up to 5.4 percent of your FUTA obligation. Thus, you only pay the remaining 0.6 percent of the tax, for a maximum of $42 per employee.11
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1 The Social Security tax also goes by the name of old-age, survivors, and disability insurance (OASDI) tax. The Medicare tax also goes by the name of hospital insurance (HI) tax.
2 IRC Sections 3111(a); 3121(a)(1).
3 See the SSA’s website for current information.
4 IRC Section 3111(b).
5 IRC Section 3101.
6 IRC Section 3102(a). You also withhold income tax. IRC Section 3402.
7 IRC Section 3101(b). The Additional Medicare tax kicks in for taxpayers at different income levels depending on filing status. However, employers must withhold for employees beginning at $200,000 regardless of the employee’s filing status. Prop. Reg. Section 31.3102-4(a).
8 IRC Section 3301.
9 IRC Section 3306(b)(1).
10 IRC Section 3302.
11 The credit only saves you tax on what you pay to the federal government. You will still have to pay the state tax or fee.
