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What a Student Entrepreneur Should Know About Employment Tax
Introduction to Employment Tax
Employment taxes are the taxes that you, your business, and your employees must pay to federal, state, and local agencies. Self-employment tax (Social Security and Medicare tax for self-employed business owners) is also considered an employment tax.
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Some taxes, like federal and state withholding, you must withhold from employee pay and turn over to the taxing authority.
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Other types of employment taxes, like FICA taxes (for Social Security and Medicare), must be taken from employee pay and also paid by you, the employer. And still others, like unemployment taxes and workers compensation, are your responsibility as an employer, but employees don't contribute to these.
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Read more for the IRS list of employment taxes, which includes only federal employment taxes. There will also be a further explanation of payroll taxes and state employment taxes. (Murray, 2019)
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How to utilize this website for your business
Welcome to "What a Student Entrepreneur Should Know About Employment Tax" website. On this website, we provide an informational guide to the employment tax. This site will specifically focus on a small business perspective of navigating through employment taxes federally and in Texas. While we provide a range of information, the site will provide a distinct focus on a small business atmosphere. The tabs on the top of the site allow for easy navigation and clear understanding of the defined resources. This site is a simplified conglomerate of a vast range of resources. Our team invites you to explore and leave a message about how our site can improve or how it may have helped you better understand the employment tax.
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~Team 3
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Difference between state and federal unemployment
Federal:
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Employers must pay unemployment taxes for their employees based on FUTA. You owe federal unemployment taxes if you paid at least $1500 in wages during any calendar quarter in the current or previous year. Employees do not pay FUTA taxes. (QuickBooks, 2019)
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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. This amount is deducted from the amount of employee federal unemployment taxes you owe. Most states have their own State Unemployment Insurance Tax Act (SUTA or SUI). If you qualify for the highest credit, then the minimum FUTA rate is .6%. Each state has its own new employer rate for new businesses. The length of time that new employers are subject to this rate also varies. Contact your state unemployment office for information on new employer rates.
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The wage base for FUTA is $7,000. Once employee year-to-date (YTD) wages exceed $7,000, an employer stops paying FUTA for that employee.
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State:
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The money collected through SUTA tax continues to go into a state unemployment fund on behalf of that state’s employees. The fund is then used to pay state unemployment insurance to employees who have become unemployed through no fault of their own, such as through company layoffs. When you hear of someone collecting unemployment, it’s likely that they are drawing from SUTA funds.
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The SUTA rate can vary, depending on the state in which your business is located, as well as the employer rating your state assigns your company (more on that below). To further complicate things for small businesses, The Department of Labor provides guidelines that each state must follow.