Payroll Tax Guide

Richard A. Beauchemin, CPA / Carolina Accounting & Tax Service, PLLC
5309 Monroe Road • Charlotte, NC 28205 • 704-375-2715 • www.carolinaaccounting.com
Payroll Tax Guide

Payroll is one of the most challenging areas that an employer has to deal with and understand.
There are a number of taxes that a business owner (employer) is responsible for paying. He is
also responsible for depositing the taxes taken out of an employees check as well as filing the
appropriate payroll reports to each agency.

This manual outlines each tax and who is responsible for paying that tax. Failure to comply with
the payroll laws will result in fines and penalties that can add as much as an additional 50%-
100% of total taxes due. Consequences for failure to comply with payroll tax violations can lead
to freezing of business and personal assets and or jail time for payroll fraud.

Taxes the Employer Is Responsible For
• Social Security Tax at a rate of 6.2%
• Medicare tax at a rate of 1.45%
• Federal Unemployment Tax (FUTA)
• State Unemployment Tax (SUTA)

Taxes the Employee Is Responsible For
• Social Security Tax at a rate of 6.2%
• Medicare tax at a rate of 1.45%
• Federal Withholding
• State Withholding

Below we describe each tax and the rates that apply. Some of theses taxes have wage limits.
This means that when an employee of yours reaches a certain wage, the tax for that wage for that
employee will no longer have to be paid for the balance of the year.

Employers Tax Liabilities

Social Security
The total tax required for social security is 12.4%. This tax is split between the employer paying
half (6.2%) and the employee paying half (6.2%). When an employee’s check is calculated the
amount of the check is reduced by 6.2% to pay for the employee’s portion of the Social Security
tax. This money is held by the employer until it is time to make the deposit to the government.

The employer pays the other half of this tax, an additional 6.2%. For example if an employee
pays a worker $1,000. The worker’s check is reduced by 6.2%, or by $62 (6.2% multiplied by
$1,000). This is the workers half of the social security tax. The employer must pay the other
half of the social security tax, an additional 6.2% on the $1,000 of wages or an additional $62.

---

Richard A. Beauchemin, CPA / Carolina Accounting & Tax Service, PLLC
5309 Monroe Road • Charlotte, NC 28205 • 704-375-2715 • www.carolinaaccounting.com
When the tax deposits are made the employer must submit a total of $124. This includes the $62
he held back from his worker along with his half of the social security tax. The $124 equals
12.4% of the $1,000 in wages paid to the employee.

The maximum wages that are subject to social security tax in 2007 is $97,500. Once an
employee reaches $97,500 in 2007, additional wages earned by that employee are not subject to
additional Social Security taxes.

Medicare Taxes
The total tax required for Medicare tax is 2.9%. This tax is split between the employer paying
half (1.45%) and the employee paying half (1.45%). When an employee’s check is calculated
the amount of the check is reduced by 1.45% to pay for the employee’s portion of the Medicare
tax. This money is held by the employer until it is time to make the deposit to the government.

The employer pays the other half of the Medicare tax, an additional 1.45%. For example if an
employee pays a worker $1,000. The worker’s check is reduced by 1.45%, or by $14.50 (1.45%
multiplied by $1,000). This is the workers half of the Medicare tax. The employer must pay the
other half of the Medicare tax, an additional 1.45% on the $1,000 of wages or an additional
$14.50.

When the tax deposits are made the employer must submit a total of $29. This includes the
$14.50 the employer held back from his worker, along with his half of the Medicare tax. The
$29 equals 2.9% of the $1,000 in wages paid to the employee.

There is no maximum wage limit for Medicare tax. Therefore all wages are subject t to
Medicare tax regardless of high the income is.

Unemployment Taxes (Federal – FUTA and State – SUTA)
The Federal Unemployment Taxes (FUTA) along with the State Unemployment Taxes (SUTA),
provide for payments of unemployment compensation to workers who have lost their jobs. The
FUTA tax rate is currently set at a rate of 6.2% for the first $7,000 of wages per employee.
However this rate will vary based on the SUTA tax rate.

Employers will receive a credit equal to the amount of the SUTA rate up to 5.4%. For example
if your NC SUTA rate is set at 1.2%, your FUTA tax rate is reduced by 1.2% or to a rate of 5%.
If the SUTA rate increases to 3% the FUTA rate is reduced to 3.2%.

Again, the FUTA tax applies to paid wages for the first $7,000 paid to each employee. The
maximum FUTA tax credit you can receive is 5.4%. That means that you will have a FUTA rate
of 0.8% or greater depending on your SUTA rate.

Please keep in mind that the SUTA rate can vary each year. One key factor that is involved in
determining your SUTA rate is the number of unemployment claims against your company. If
employees file unemployment claims against your company your SUTA rate will increase.

---

Richard A. Beauchemin, CPA / Carolina Accounting & Tax Service, PLLC
5309 Monroe Road • Charlotte, NC 28205 • 704-375-2715 • www.carolinaaccounting.com

Also, the taxable wage base of the SUTA taxes is different than the FUTA tax rate. For the state
of NC the first $17,800 per employee is subject to the SUTA tax. For most new businesses in
NC the SUTA rate will start at 1.2%. In subsequent years it may decrease or increase and can
range from .00% to a high of 6.84%.

To demonstrate how the FUTA and SUTA taxes work an example is listed below

Employer XYZ has 10 workers in NC. Their wages vary but they all make greater than
$20,000.The NC SUTA tax rate is 1.2% on the first $17,800 of wages per employee and the
FUTA tax rate is reduced by the 1.2% to 5% on the first $7,000 of wages

The total SUTA taxes due from that employer can be calculated by multiplying $17,800 (the
maximum taxable wage base in NC) by the number of employees whose wages meet or exceed
the $17,800. In this case all the employees are making more than $17,800. In this ten employees
times $17,800 per employee equals $178,000 in wages subject to the SUTA tax.

At a SUTA tax rate of 1.2% the total SUTA taxes due is calculated by multiplying the $178,000
in wages subject to the SUTA tax by 1.2% (1.2% times $178,000), which equals $2,136.

The employer is also responsible for the FUTA taxes. They would be calculated as follows:
Since the NC state rate is 1.2%, the FUTA rate would be reduced by that same amount (6.2%
minus 1.2%) to 5% on the first $7,000 wages per employee. There are ten employees so the total
amount of wages subject to FT=UTA tax is $70,000. This multiplied by the 5% rate equals
$3,500. The employer would be responsible for $3,500 in FUTA taxes.

In summary the total unemployment taxes that the employer would be responsible for is $2,136
for the state unemployment tax and $3,500 for the federal unemployment tax or a total of $5,636.

As the employer adds employees during the year he will have to pay both the SUTA and FUTA
taxes on the wages of the new employees until he reaches the wage thresholds for the new
employee.

• One key piece of information that we require at the beginning of each year from our
clients is the State Unemployment Rate (SUTA rate). Not having this information can
result in either overpaying or underpaying unemployment taxes.

Employees Tax Liabilities

Social Security
The employee is responsible for paying 6.2% of the social security tax, however it is the
employer’s responsibility to deposit these taxes and file the tax reports on behalf of the
employee. When an employer issues a check to an employee, they reduce the gross wages by
6.2%. This is the employees half of the social security taxes. The employer must make this

---

Richard A. Beauchemin, CPA / Carolina Accounting & Tax Service, PLLC
5309 Monroe Road • Charlotte, NC 28205 • 704-375-2715 • www.carolinaaccounting.com
deposit on behalf of the employee as well as deposit his half of the social security tax – an
additional 6.2% for a total of 12.4% of the total wages paid to the employee. Once the maximum
wage rate is met ($97,500 in 2007), the employer should make no further social security tax
deductions for that employee.

Medicare
The employees is responsible for paying 1.45% of the Medicare tax, however it is the employers
responsibility to deposit these taxes and file the tax reports on behalf of the employee. When an
employer issues a check to an employee, they reduce the gross wages by 1.45%. This is the
employees half of the Medicare taxes. The employer must make the deposits on behalf of the
employee as well as deposit his half of the Medicare tax – an additional 1.45% for a total of
2.9% of the total wages.

Federal Withholding
The federal withholding amount for an employee is determined based on the number of
dependants claimed on the W4. The gross wages of the check are reduced by the amount of
federal withholding tax. The employer holds this money on behalf of the employee until it is
time to make the tax deposit. It is the employer’s responsibility to deposit all of this tax to the
federal government.

State Withholding
The state withholding amount is determined by the number of dependants claimed on the NC4,
or other state withholding form. The gross wages of the check are reduced by the amount of
state withholding tax. The employer holds this money on behalf of the employee until it is time
to make the state tax deposit. It is the employer’s responsibility to deposit this tax to the state
government.

Example
The following is an example of how one would calculate a payroll and determine the taxes that
have to be deposited

An employer has three employees that make the amounts listed below.
Employee X has gross wages of $3,000 for the month
Employee Y has gross wages of $2,500 for the month
Employee Z has gross wages of $2,000 for the month

Employee Gross
Social
Medicare Federal State
Total Taxes
Net Pay
Wages
Security Tax
Taxes
Taxes
Withheld
Tax
X $3,000
$186
$43.5
$204
$156
$589.5
$2410.50
Y $2,500
$155
$36.25
$268
$132
$591.25
$1908.75
Z $2,000
$124
$29
$198
$99
$450 $1550
Totals $7500
$465 $108.75
$670
$387 $1,630.75
5869.25

---

Richard A. Beauchemin, CPA / Carolina Accounting & Tax Service, PLLC
5309 Monroe Road • Charlotte, NC 28205 • 704-375-2715 • www.carolinaaccounting.com
In this example the employer paid his employees gross wages that totaled $7,500. The employer
withheld a total of $1,630.75 on behalf of his employees. The $1,630.75 has to be deposited by
the employer for his employees. In addition the employer is responsible for the following taxes.

Assume this is the beginning of the year and the employer has not reached any of the wage limit
thresholds for his employees for social security, FUTA or SUTA taxes. We will also assume he
has a SUTA rate of 1.2%. The taxes would be calculated as follows.

Employer’s
Social
Medicare FUTA
(5%) SUTA
Total Taxes
wages to be
Security
(1.2%)
for
paid
employer
$7,500 $465
$108.75
$375 $90 $1,038.75

The employer owes $1,038.75 for his share of the Social Security and Medicare taxes as well as
the FUTA and SUTA taxes that the employer is responsible for paying.

In total the employer will have to make a total tax deposit of $2,669.50 which includes the
employees’ taxes of $1,630.75 and the employer’s taxes of $1,038.75.

Note
Employers should not mess around with payroll compliance. The federal as
well as the state agencies treat payroll tax violations very seriously. Failure to
comply with the payroll tax laws constitutes payroll fraud and is punishable
by severe penalties and interest and could possible lead to freezing of assets
and or criminal penalties.

---