Have you just hired your first employee?  For most small businesses, this means that your company is growing and work is so plentiful that you can't do it on your own any more.  That's a great position to be in.  But now, with your very first employee, you are subject to a new category of tax: payroll taxes.  What are these new taxes and how do they work?

The term "payroll taxes" generally refers to three types of taxes that each employer must calculate and pay.  Here's a short breakdown of each category. 

Income Tax Withholding

All employees should complete a copy of IRS Form W-4 to indicate how much of each paycheck should be withheld for them and sent to the IRS and state taxing agencies.  This is a prepayment of what the employee will owe as their federal income tax burden and state income tax burden (if the state has an income tax).  It's mandatory to withhold, but how much is withheld is largely up to the employee.  There's a checklist on Form W-4 that the taxpayer may use as a guideline in choosing how to fill out the form, but the worker may claim any number of exemptions he or she wants.  The employer should not fill out this form for any employee. 

FICA Taxes

Named after the Federal Insurance Contributions Act, these taxes are imposed on both the employee and his or her employer as a contribution to Social Security and Medicare.  They are a percentage of the gross income being paid and are currently an equal burden for both worker and company—neither of which is refundable.  For 2015, this amount is 6.2% for Social Security and 1.45% for Medicare—from the employee and the employer—on wages up to $185,000 for the year  Employees earning more than $200,000 may be subject to additional Medicare taxes. 

As an employer, you will need to collect the employee's half out of the paycheck and then send the full amount (a total of 15.3% for both you and your worker) to the Social Security Administration. 

Unemployment Taxes

Federal unemployment taxes are levied on the employer only.  For 2015, the rate is 6% of the first $7,000 that an employee earns.  However, a credit of 5.4% is offered to those companies who must also pay into a state unemployment fund.  This tax is paid annually on Form 940, which is sent to the IRS. 

With new employees comes new responsibilities and new oversight by various agencies.  Even with a basic understanding of your obligations as an employer, it may still be best to outsource this work to a qualified payroll service like A & C Accounting & Tax. That way, you can get back to the task of running your burgeoning business.