For both employees and employers, salary tax can be difficult to understand. However, paying taxes means we contribute to society and receive help in times of need. Using a salary tax calculator is the easiest way of calculating how much you and your employees owe. Let’s delve into the world of taxation.
What Is a Salary Tax?
Both businesses and employees have one thing in common; they’re paid for providing a service to others. Clients pay businesses, and they reward their employees with a monthly paycheck, bonuses, and commission. However, any money you earn is subject to income tax.
We all remember the first time we discovered how much tax costs. That anticipation of finally receiving the first paycheck is replaced by a sense of disbelief and many (including us) ask “Where did my money go?” Everyone must contribute to three federal taxes and not paying them can result in serious repercussions.
Employers also struggle to understand payroll laws. If you’re wondering how much tax do I pay on salary each year, we’ve broken it down for you.
Federal Salary Tax
If you want to work out what an employee’s salary will amount to after-tax, you should use a salary after tax calculator. There’s no standard amount, and federal tax rates get higher when your income increases.
The amount of income tax an employee pays depends on how they fill in their W4 form. Employers find W4 forms useful because they enable them to calculate how much of each employee’s paycheck they should hold back. If you’re unsure about how W4 forms work, this helpful guide can answer your questions.
Medicare can be a lifeline for people with severe health issues, especially when their insurance doesn’t cover the treatment. Everyone has to pay Medicare taxes because if they didn’t then Medicare wouldn’t exist!
As of 2019, the Medicare rate is 2.9%, split between employee and employer. As an employer, you’ll have to pay 1.45% Medicare tax for each employee, every pay period. Incomes that exceed $200,000 a year will have to pay an added 0.9% of Medicare tax. However, married people that file only have to pay extra if the income exceeds $250,000 a year.
Social Security Tax
Both employers and employees are responsible for social security tax, and the flat rate is 12.4%. So what does this mean? In simple terms, it means that both parties split the 12.9%, so each pay period you’ll each pay 6.2%.
One important rule you must know is the earnings limit. If you pay your employee more than $132,900 a year, you only need to calculate the social security tax to that amount. Any earnings over the limit are exempt from social security tax.
Using a salary calculator can make the process a lot easier, but it’s important you understand your responsibilities and withhold the correct amount from your employee’s paycheck.
Besides paying federal tax, you must pay state taxes. Most states impose their own taxes except Texas, Florida, Nevada, Alaska, Washington, Wyoming, and South Dakota. Before you think about packing up and moving to one of these states, we feel it’s important to tell you that they also impose high sales taxes.
California State taxes are quite complex, so we recommend you use a California salary tax calculator to work out how much you need to pay. There’s no set amount of California state tax because it increases depending on the annual income.
For example, individuals that have $8,544 of taxable income will pay state tax at a rate of 1%. The highest amount is a rate of 12.3%, but that’s for people with $572,981 of taxable income.
Federal Unemployment Tax
Employers are liable to pay Federal Unemployment Tax, which funds the governments account for unemployed people. However, if an employee voluntarily leaves a company, they won’t receive unemployment benefits. If you have to downsize your business, then the government will pay for the staff members you let go. This is why as an employer, you have to pay Federal Unemployment Tax.
States also collect unemployment tax, but you might be exempt depending on where you live. We advise you to check your state’s employment agency for more information.
Do I Need to Pay Salary Tax?
If your business has employees, then yes you do need to pay salary tax. Small business owners often get confused about salary tax, but for each employee you hire, you must fulfill your tax obligations. This includes paying FICA (medicare and social security), Federal, State, and Local taxes and Federal Unemployment Taxes.
Some states also require employers to pay disability insurance taxes. If you’re a small business owner and don’t have employees, the above rules apply to you if you’re incorporated. However, if you don’t have employees and aren’t incorporated, you’ll need to pay self-employment taxes. If you’re wondering “How much will my salary be after tax?”, use Quickbooks self-employment calculator to find out.
Things get more complicated when you have to decide if your workforce is taxable employees or independent contractors. While both are subject to employment taxes, independent contractors pay their own. One way to define if you have taxable employees or independent contractors is their responsibilities within the company.
If someone works solely for your company, then they’re most likely an employee. Independent contractors often work for many companies and advertise their services.
It’s important to note that many business owners offer their employees benefits, such as health insurance, gym memberships, and incentive schemes. One of the most popular employment benefits is student loan repayment schemes. FutureFuel has bespoke solutions for employers to offer this invaluable benefit to their workforce.
While it’s great to offer benefits to your team, make sure you can afford to do so on top of the salary taxes you’ll pay. Our employee cost calculator offers a detailed breakdown of how much money you’ll spend on each team member.
When You Should Pay Salary Taxes
The IRS decides when you should pay employer salary taxes, based on your accumulated Social Security and Medicare liability for each yearly period that ends on 30th June. The total amount of employment taxes you report during this period decides when you’ll make payments, which is also known as the look-back period.
You can calculate your look-back taxes by adding each of your 941 (Quarterly Wage and Tax Return) Forms together to determine the payment schedule. New employers and businesses with tax amounts of $50,000 or less can make monthly deposits. However, if your taxes were more than $50,000, you’ll make semi-weekly deposits.
Failure to pay salary taxes has severe consequences. It’s vital you pay your taxes on time because 70% of the IRS yearly revenue comes from payroll taxes. When employers don’t report and pay their taxes, they contribute to a growing tax gap, which affects the whole country.
If you don’t adhere to the laws, you’ll pay a penalty and might even face criminal proceedings. Late payments also incur penalties, based on how many days you’re behind. If you exceed 10 days, you’ll have to pay 15% of the amount due.
How to Manage Your Employer Salary Taxes
With so much at stake, we can see why employers worry about their salary tax obligations. However, you can find all the information you need on the IRS website. You’ll find a tax withholding estimator and general information on how to make payments.
Our salary after tax calculator makes it easy to work out your costs and keep up to date with payments. As an employer, paying taxes is unavoidable, but with some help, you can make the process painless. You can use Future Fuel’s paycheck calculator to know what is employees’ take home pay per paycheck for both salary and hourly wage jobs after taking into account federal, state, and local taxes when compared to their gross income.
How to Use Future Fuel’s Salary Paycheck Calculator California
We made it simple for you. Filling out the full-time and hourly paycheck calculator is very intuitive. The check date and the state are automatically filled for you.
Then, you need to insert the gross pay, which is the total amount your employee would earn before tax deductions are withheld. Don’t forget to select the gross py method — if the gross income is annual or if you pay it per period. Still on the gross pay topic, you will need to insert the Gross Pay YTD, which can be found on your latest pay stub. After that, you’ll need to specify the pay frequency and if the employee is exempt from Federal Income Tax, FICA, or Medicare taxes.
The next step will be to fill out Federal information, which includes Federal filing status, number of Federal Allowances, additional federal withholding, and Round Federal Withholding.
Once the Federal information is ready, you’ll need to fill out the State information. That includes regular allowances, California SDI, Exempt State, State Marital Status, additional state withholding, Additional Allowances, and Supplemental Type.
Then, you just need to specify the involuntary and voluntary deductions — such as HSA — and it is ready to calculate.