How to Figure Employer Tax Liabilities
As an employer in the United States, you have employment tax obligations, which are separate from the taxes you are supposed to withhold from employees’ paychecks. Specifically, most employers are supposed to pay federal and state unemployment taxes, and Medicare and Social Security taxes. You pay federal unemployment tax (FUTA) and Medicare and Social Security taxes to the Internal Revenue Service, and state unemployment tax (SUTA) to the state unemployment agency. Follow the respective agency’s guidelines when calculating your tax liabilities.
- Consult IRS Circular E to see if you are liable for FUTA tax. For example, you must pay FUTA tax in 2012 if you paid wages of $1,500 or more in any quarter of 2011 or 2012 to employees who are not household or farm workers, or if you had one or more workers for at least a partial day in any 20 or more different weeks in 2011 or 2012.
- Calculate federal unemployment tax at 6 percent of the first $7,000 paid to each worker, as of 2012. Once the employee earns at least $7,000 for the year, you do not owe any more FUTA tax on that employee for the year. If an employee does not earn at least the annual wage base, pay FUTA tax on whatever amount she earned.
- Pay Social Security tax at 6.2 percent of taxable wages paid to each employee, up to $110,100 for the year; and Medicare tax at 1.45 percent of all taxable wages paid. Medicare tax has no annual wage limit; you pay it on all wages.
- Consult the state unemployment agency for your state unemployment tax rate and wage base. The agency generally sends employers their rate for the upcoming year before the New Year begins. The agency also sets the rules concerning which employers are liable for SUTA tax.
State unemployment tax rates vary by employer and usually depends on the longevity of the business, whether it’s a construction or non-construction business and the number of former employees who has drawn benefits on your account. Typically, the more benefits drawn on your account, the higher your rate.
For example, in Ohio and in 2012, the new employer unemployment tax rate is 2.7 percent and the rate for new construction employers is 7 percent. The state annual wage base varies by state. For instance, as of 2012, Alabama employers pay unemployment tax on the first $8,000 paid to each employee, and Connecticut employers pay unemployment tax on the first $15,000 paid to each employee.
- Take a credit against your federal unemployment tax for state unemployment tax payments you made. You may take a credit of 5.4 percent if you paid your SUTA tax in full, on time and if your state is not a credit reduction state; this lowers your federal unemployment tax liability to .6 percent instead of 6 percent. A credit reduction state is one that owes the federal government for borrowed unemployment funds.
Employer tax rates are subject to change, typically, yearly. Ensure you obtain the appropriate rates from the respective agency before calculating your liabilities.
Consult IRS Circular E for your FUTA tax payment schedule, which is generally due quarterly. File annual unemployment tax reports with the IRS via Form 940.
Pay state unemployment tax liabilities to the state unemployment agency according to its policies. Many state agencies require quarterly payments and reporting.
In some states, the same wages that are subject to federal unemployment tax are also subject to state unemployment tax. However, in some states, certain wages that are subject to FUTA tax are not subject to SUTA tax, such as certain fringe benefits and wages paid to corporate officers. In these instances, your FUTA tax rate may exceed .6 percent; consult the instructions for Form 940 or contact the IRS directly for additional guidance.