Understanding FICA Taxes, Unemployment Insurance

When you hire employees, you not only have to pay their wages but will also have to cover the associated payroll taxes, workers Comp and Administration Cost which are all added to each invoice you receive when you report your hours to us. Payroll taxes include Social Security and Medicare taxes (FICA taxes) and unemployment taxes. Workers Compensation is mandatory by law in all states other than Texas.

Employer Payroll Tax Rates & Unemployment Insurance

Percentage of Employee Wages Income Cap on Taxes Total Cost for Employee Earning $30,000 Annually
Social Security Taxes 6.20% $127,200 (tax year 2017) - $128,700 (tax year 2018) $1,860
Medicare Taxes 1.45% Unlimited (no income cap) $435
State Unemployment Insurance* Typically 2.7% - 5.4% Typically $7,000 - $10,900+ $810 - $1,020
Federal Unemployment Insurance (FUTA) CA/Virgin Islands: 2.1%
All other states: 0.6%
CA/Virgin Islands: $7,000
All other states: $7,000
CA/Virgin Islands: $147
All other states: $42
Blue Collar Workers Compensation Insurance Typically $7.00 per every $100 paid in wages, but varies widely N/A $2,100
*Avg new employer rates

Based on the above chart, you could pay an average of $5,400 in FICA tax, unemployment tax and workers comp insurance for an employee earning $30,000 per year if you're in an industry like construction.

Note: Keep in mind that state unemployment rates will vary depending on how often you fire employees and how many of those employees who have been fired receive unemployment benefits. Our company removes this burden from you through our co-employer relation we form with each of our clients. This allows you to hire and fire freely under the laws of your state without with the worry that your unemployment rates may fluctuate.

FICA Taxes (Social Security + Medicare)

Social security and Medicare taxes are also known as FICA taxes. This makes up the bulk of payroll taxes you must pay as an employer and is included in each invoice every time you report your payroll. These FICA taxes are paid traditionally either monthly or bi-monthly and reported quarterly using Form 941 but when you join a PEO, its paid weekly since the PEO pays it under their 941's on a weekly basis as well.

The 2 FICA tax rates for employers are:

  • Social Security tax rate – You must pay 6.2% of employee salary/wages, up to a maximum wage of $127,200 (2017 tax year) or $128,700 (2018 tax year)
  • Medicare tax rate – You must pay 1.45% of employee salary/wages; unlike Social Security, there is no salary/wage cap.

Employers and employees each contribute 50% of the entire Social Security and Medicare tax (FICA tax). This means that the actual Social Security tax rate is 12.4% and the actual Medicare tax rate is 2.9%. However, employers are only responsible for paying 50% of these taxes and withholding the remaining 50% from employee paychecks.

Social Security Tax Rate

Let’s assume that you have an employee that earned $28,000  for the year. Here is how you would calculate your employer share of Social Security taxes:

$28,000 X 0.062 = $1,736.00

There is a salary cap of $127,200 for Social Security. Your employer share of Social Security is limited and capped at the base of 6.2% of $127,200.

Medicare Tax Rate

For Medicare, we used the total salary of $28,000 that was earned to calculate your employer share of Medicare. Unlike Social Security, there is no salary/wage cap on Medicare. Here’s how you would calculate your employer share of Medicare taxes for an employee who earns $28,000 annually:

$28,000 X 0.0145 = $406.00

Unemployment Insurance (FUTA & SUTA)

As an employer, you are also required to pay unemployment insurance at both the federal and state level for each of your employees. These are known as either federal unemployment tax (FUTA) or state unemployment tax (SUTA). You pay this tax regardless of whether or not you actually have a former employee collecting unemployment.

State Unemployment Tax Rates

State unemployment tax (SUTA) rates are set by the state for each employer. SUTA rates are generally based on the number of employees that you have fired and how many of those employees make unemployment claims.

Depending on the process established by your respective state, you will either receive your unemployment rate via mail or electronically sometime between October through December. Typical rates range from 2.7% – 5.4%. This rate is effective beginning January 1, of the following year.

Federal Unemployment Tax Rates

Federal unemployment tax rates (known as FUTA) is a flat 6%. However, if you have paid your state unemployment taxes on time, your FUTA tax is reduced to 0.6%. Our PEO offers you the 0.6%. The current exception to this rule is employers in the state of California. The state of California owes money to the federal government, so as a result California employers must pay 2.1% for FUTA tax.

Our Pay-As-You-Go Workers Compensation Insurance

In addition to the payroll tax obligations, you are also required to carry workers’ compensation insurance. It’s the law unless your in Texas. Workers comp insurance covers your employees in case they are injured on the job. Our Pay-As-You-Go Workers Compensation program allows you to only pay for what you use as you would pay for your utility bill. This allows you the freedom of annual audits and flipping a large bill at the end of the year. In most states, workers compensation insurance is sold and underwritten by private companies who either do not specialize in Workers Compensation or only have access to carrier that accept white collar office companies.

For example, the rate for a roofer is about $21.29 per every $100 in wages vs. someone who works in an office like an accountant, whose rate is approximately 0.23 cents per $100 in wages. Here are some other examples of Workers Compensation Cost for 2018:

Industry Cost of Workers Comp (per $100 of payroll) Annual Cost for Employee earning $40,000
Roofing $21.29 $8,516
Framers $19.40 $7,760
Painter $12.63 $5,052
Interior Trim Carpenter $11.11 $4,444
Drywall $8.61 $3,444
Jewelry Store $0.83 $334
Banker $0.30 $120
Accountant $0.17 $69

In general, workers compensation insurance costs are based on industry. The riskier the job, the higher the rate. At PEOpaygo, not only do we have a 96% client approval ratio but we clearly understand what your workers compensation needs are. Click here to see what your rate is.

Rates will also vary by state, so be sure to check out our state by state guide, click here.

The Bottom Line – FICA Tax

Whether you have just hired your first employee or you’ve had employees for a while, keeping up with new hire requirements can be overwhelming. One component of these requirements is that you adhere to and pay all necessary payroll taxes like FICA Tax.

PEOpaygo is able to handle your full payroll needs, which includes setting up employees, calculating paychecks, and calculating all of the payroll taxes we have discussed in this article. Call us today at 1-800-355-7741 speak to a live agent who can answer any questions you have.

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