Employer Taxes 101—FICA, FUTA, SUTA Decoded

Labor costs, which can be made up of wages, benefits, insurance, taxes, admin, and more, can account for up to 70 percent of your total business expenses. While many employers think there’s little they can do to reduce these costs, there are actually ways to take control. With this Real Cost Series, we put a magnifying glass on employer labor costs and break down powerful business strategies that can improve your bottom line without adding to your “to do” list.

If you’ve been following our Real Cost Series, you already know that wages are only part of the picture when it comes to tallying up the true cost of labor. Medical coverage and benefits, a variety of insurances, and administrative costs, all add to your bottom line.

And of course, employer taxes are a part of that equation as well.

Employer taxes have a variety of names. They’re often a mouthful to say so you’ve likely heard them referenced in their simplest forms: FICA, FUTA, and SUTA. But knowing what these federal and state taxes mean can be a confusing—and an expensive—alphabet soup. Which is why in this article, we’re unpacking these acronyms to help you digest the basics of these employer taxes.

What is FICA?

The first major type of employer tax is FICA, which stands for the Federal Insurance Contributions Act, and is a mandatory payroll tax.

This payroll or FICA tax is made up of two separate taxes that fund two large programs managed by the Federal Government: Social Security and Medicare. These programs provide supplemental income and health care for the disabled and elderly.

Social Security:

The Social Security part of the FICA tax is a flat rate of 12.4% and applies to the first $128,700 an employee earns in 2018. This tax provides monetary assistance to people who are retired, disabled, or unable to work, and is split equally between you and your employee. You will pay 6.2% of Social Security tax. You will also withhold 6.2% from the employee’s wages.

Medicare:

The smaller portion of the FICA tax goes to Medicare and is taxed at a flat rate of 2.9%. It’s also split between you and your employee as well. You will pay 1.45% and withhold 1.45% from your employee’s wages. This tax provides health insurance to people who are retired or disabled. While an employee’s taxable earnings are capped at a certain amount for the Social Security portion of the tax, there’s no cap for the Medicare portion.

What is FUTA and SUTA?

The second major type of employer tax that’s required for businesses are unemployment taxes. Like payroll taxes, unemployment taxes are made up of two separate components as well: FUTA and SUTA.

FUTA Stands for “Federal Unemployment Tax Act”:

FUTA is a federal unemployment tax that’s imposed on employers and is used to fund unemployment insurance programs and job placement programs run by states. Although FUTA payroll tax is based on an employees’ wages, unlike FICA, this tax is paid only by employers.

So how much FUTA tax do you have to pay? The base FUTA tax rate is 6% of the first $7,000 of income for each employee. However, if pay your FUTA tax each quarter before it’s due, you can receive a tax credit of up to 5.4%.

SUTA Stands for “State Unemployment Tax Act”:

Going hand in hand with federal unemployment taxes is SUTA, which is a state unemployment tax on employers. Also known as State Unemployment Insurance, or SUI, this tax is paid directly to the state to provide unemployment benefits to laid-off workers. Unlike FUTA, the rate you pay for state unemployment insurance will vary from employer to employer.

Pro-tip: Joining forces with a HR partner can actually lead to lower SUTA or SUI rates—this tax doesn’t have to be just another cost of doing business that you can’t control. 

In Hawaii, the rate starts at 2.4% for new businesses, but could change from year to year, based on a number of factors. In Hawaii, the maximum rate for SUTA is 5.6% of an employee’s taxable earnings. And only a portion of the employee’s income is taxable for SUTA—up to $45,900 for 2018.

There’s a Better Way to Manage Payroll Taxes

Accurate and timely payroll tax administration is critical to the good standing of your business.

But calculating and keeping up with the details of payroll processing and payroll tax administration can feel complicated and time consuming. Especially if you’re handling it yourself, or if you’re managing multiple vendors and experts for things beyond payroll, like health care, workers’ compensation, or year-end W-2 processing.

At ProService Hawaii, payroll processing and tax administration is second nature. You report wages and hours. We do the rest. Paying people on time? Easy. Calculating and filing payroll taxes? Simple.

Learn more about our Hawaii payroll services and how we can help manage your employer taxes, control your labor costs, and start the New Year off right. Visit https://info.proservice.com/guarantee for details.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. Please consult with your professional legal or tax adviser if you have questions about this content.