Small Business Payroll Taxes Explained

Hello to my favorite entrepreneurs. I just know if you haven’t hit that gold mine, you are just a good strike away. Welcome to another read on The Keys. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!!

It’s time for another truth about small business. I often get the question about small business taxes and what and when to pay them. Depending on your business formation, size of your staff, revenue and a ton of other factors, you could be required to pay more than annual federal taxes on the profit of your business. And businesses with employees will be surprised to see how much in taxes they must fork over monthly, quarterly and at year-end.

Federal Income Tax

This one is no bigger, right? We all know that we must pay federal income taxes, regardless of employment type, and the percentage due is based on your gross pay minus pre-tax deductions. And then our household size and marital status can contribute to additional tax savings compared to a single person with no children. No surprise here.

State Income Tax

State Income Tax is only applicable in states that impose a tax on those that work and/or live in that state. Now, fortunately, if you live in Texas like I do, you are not subject to pay state taxes. But in other states, like California, you have a more complicated computation. The base rate for that state is 7.25% and tops out at 13.3%. That, on top of Federal Income Tax, can be a financial burden that most small businesses are not quite in the position to afford.


FICA, or the Federal Insurance Contribution Act, is a system to payroll tax deductions used to fund Social Security and Medicare beneficiaries. The current tax rate is 7.65% - 6.2% Social Security OASDI and 1.45% Medicare Tax. Businesses with employees must also match these figures making the total paid on a worker’s wages a whopping 15.3%. The good news is the tax is maxed out at an annual salary of $128,400, an increase of $1,200 from 2017. For example, if a small business has a full-time bookkeeper on staff, with an annual salary of $48,000, the total FICA tax is $7,344, half of which is paid by the employer.  This comes as a shocker to most small business owners starting off which is why it is advisable to consult with a professional before launching your business.


The Federal Unemployment Tax Act is a federal establishment that controls the apportionment of the costs of unemployment insurance programs among states. Employers are required to pay federal and/or state unemployment taxes to fund the government’s unemployment account. When an eligible worker becomes unemployed, he will be paid from this fund for up to six months, or more. A business is required to pay this tax if they paid at least $1,000 in wages during any calendar quarter in the current or past year.


Depending on which state your business operates in, you may be subject to other taxes as an employer. Some small business owners will try to avoid paying these taxes on behalf of their works by hiring on a 1099 basis. The issue is, each state is very clear about who is classified as an employee and who can be classified as a contractor. Topic 762 explains the difference between the two. No matter how you feel about the tax liabilities of your business, it’s best that we remain proactive and not reactive to the responsibility of business ownership. Speak with your bookkeeper about options to for better management of these requirements so that you keep your financial house sound.

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