Video transcript:
Hello, I’m Jill from TurboTax with some important information for business owners about payroll taxes.
As an entrepreneur, you probably realize that there are some business expenses you just can’t control—like the payroll taxes you have to pay for yourself and each person you employ.
When your business can’t operate without employees, your budget should always take into the account the cost of payroll taxes that employers are responsible for—in addition to the salaries you pay.
The most costly of the payroll taxes are the Social Security and Medicare taxes. Your employees make contributions to both programs—which you’re responsible for withholding from their paychecks—but the federal government requires you to make a contribution in addition to what your employees have to pay. In most years, your payment is the same as each employee’s, but in some years it can be a little more.
To see how these two payroll taxes affect your bottom line, take for example an employee who earns a salary of $100,000 per year. On top of that, you need to pay an additional 6.2% or $6,200, to cover the Social Security tax and another 1.45%, or $1,450, for the Medicare tax. So in reality, the employee costs your business $107,650 or more—not just $100,000.
Unfortunately, these aren’t the only payroll taxes you need to pay. Employers are also responsible for paying federal unemployment taxes, or FUTA—which are also calculated as a percentage of a portion of each employee's salary. And depending on where you operate the business, you may have to pay similar unemployment taxes at the state level too.
Luckily, the IRS lets you take deductions from your business income for the payroll tax payments you make. And it doesn’t matter whether you operate a corporation with 50 employees or a sole proprietorship with just one employee—you can always reduce the income tax on your business earnings with a deduction for payroll taxes.
There is one way you can avoid paying employment taxes entirely, but this requires that you only use independent contractors to provide the services that your business needs. When you hire independent contractors, they aren’t eligible for unemployment benefits and they, not you, are responsible for paying all Social Security and Medicare taxes. There are strict rules about who is employee and who is an independent contractor. So, contact your local state employment department to make sure that you are using the correct classification.
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