One of the biggest issues I run into is business owners not classifying their workers as independent contractors. When asked about it, they say they are unable to make a profit if they make their workers employees due to tax obligations and workers compensation costs. I am going to tackle what exactly is the employer’s tax liability below. When you are in the know, you are able to build this cost into your bid and still make the same profit.
Unless your organization is exempt (e.g. a charitable organization) you need to pay into federal and state unemployment insurance. Federal contributions are governed by FUTA (Federal Unemployment Tax Act). FUTA’s maximum taxable earnings are $7,000, anything an employee earns beyond that amount is NOT taxed. The standard FUTA tax rate is 6% so your max contribution per employee could be $420/yr, however, you can claim a tax credit of up to 5.4% (a max of $378) on your yearly taxes (if your taxes are paid in full and on time). Each state runs its own unemployment insurance program (SUI).
Employee taxes for federal and state are withheld from every check you pay the employee. The amount to withhold is calculated based on the information the employee provided on the Form W-4.
Both the employer and employee are responsible for Social Security and Medicare (FICA). The wage base for Medicare has not limit, so both you and the employee are on the hook for 1.45% taxes on everything earned. Social Security has a wage base of $132,900. Both you and your employee will be taxed 6.2% (up to $8,239.80) each with the current wage base. Your employee’s FICA contributions are withheld from their wages as well.
So, let’s put these figures to work. You hire a full-time worker whose salary is $45,000 per year and he is paid monthly ($3,750). Your payroll liabilities would look like this:
- Salary – $45,000
- FUTA – $420
- Medicare – $652.50
- Social Security – $2,790
TOTAL PAYROLL COST FOR EMPLOYER PER EMPLOYEE = $48,862.50
Don’t let this additional $3,862.50 cost you thousands of dollars in fines and penalties for erroneous classification of your workers! Protect your company, your employees, and your investment!