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Congratulations: Your business has employees and revenues! Get ready to pay taxes.
Federal, state and local taxes are a fact of life, and they will take a bite out of your revenues. But if you fail to pay them on time, penalties will only make the pain worse.
Most of us associate taxes with the IRS, but of course Uncle Sam is not the only tax collector: All but eight states have an income tax, as do cities and localities have one as well. Again, it’s your responsibility as an employer to withhold and pay them.
At the federal level, it’s all about the payroll taxes. If you have employees, they need to fill out Form W-4, which is used to determine how much income tax to withhold from their wages. It’s your responsibility as the employer to withhold the proper amounts and send them to the government.
FICA taxes. FICA refers to the Federal Insurance Contributions Act, a federal law that requires businesses and other employers to withhold both Social Security taxes and Medicare taxes from employees’ wages.
Employer and employee each pay half of the FICA tax. The combined rate for these taxes is 15.3%–that’s 12.4% for Social Security and 2.9% for Medicare. Employers and employees each pay 6.2% and 1.45%, respectively.
If you’re self-employed, you must foot the entire 15.3% tax yourself.
By the way, Social Security taxes apply to the first $106,800 of wages; anything above that is safe. On the other hand, there is no wage limit for the Medicare tax.
Those Social Security taxes, of course, go toward the retirement safety net for Americans. And Medicare taxes are used to provide health insurance coverage to those aged 65 and over, but they’re also used for other purposes, such as funding the residency training programs for most of the country’s doctors.
FUTA. It sounds like a soccer association, but it actually stands for the Federal Unemployment Tax. Unlike FICA, these taxes are footed entirely by you, the employer.
The FUTA rate is 6.2%, and it applies to the first $7,000 of wages for each employee. In case you’re wondering where that money goes, it’s used to cover administration costs for states’ unemployment insurance and job service programs. It also pays half the cost of extended unemployment benefits, and is used for a fund that lends to states to pay benefits.
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