Payroll Basics 101

What are Gross Wages?

The total of all wages paid to an employee, this includes tips.

What kinds of payroll taxes are there?

Taxes can be divided into two groups: Employee paid and Employer paid.

Employee Employer
Federal Withholding  
                                         FICA OASDI
FICA Medicare
                                         FICA Medicare
                                         0.8% on first $7,000
                                         % varies and cut-off varries by state
                                           Some states have additional employer taxesWorkers Comp                                      Insurance

What taxes are paid by the employee?

Federal income taxes: Paid on taxable earnings. The rate varies depending on the amount of taxable earnings and the filing status of the employee (married, single, and number of dependents claimed).

Social Security: Rate of 6.2% paid up to the cut-off established each year ($94,200 taxable wages for 2006).

Medicare: Rate of 1.45% paid on all taxable earnings with no cut-off.

State and local taxes: Vary by state and localities. Fortunately there are no state or local payroll taxes in Florida.

What taxes are paid by the employer?

Social Security: Matches the amount paid by the employee

Medicare: Matches the amount paid by the employee

Federal Unemployment Taxes (FUTA): Rate .8% paid on the first $7,000 of each employee wages in a calendar year.

State Unemployment Taxes (SUTA): Rates and cut-offs vary by state, the following applies to Florida only: Rate varies depending on experience and time in business. The rate for new businesses in Florida is 2.7% on the first $7,000 of wages in each calendar year. After 10 quarters a Florida business receives a rate based on its history of taxable wages and claims paid by the state charged against the business. The calculated rate can be between .32% (2006 minimum rate) and the maximum of 5.4%.

What are Pre-Tax Deductions?

Pre-tax deductions: Deductions made before taxes are calculated. Example, deductions for health insurance that are included in a Section 125 Cafeteria plan. With pre-tax deductions the employee doesn’t pay Social Security, Medicare or Federal Income Tax on the amount deducted. And the employer saves money because his Social Security and Medicare match is reduced as well.

What are Tax Deferred Deductions?

Tax deferred deductions: Deductions excluded from current federal income tax. Social Security and Medicare are still paid. At some future point in time when the employee receives the money which had been deducted income taxes are calculated based on rates and income at that time. Examples of deferred deductions would be 401k or simple IRA plan deductions.

Note: Pre-tax or tax deferred deductions require approved documentation.

What is the difference between a Payroll Service and Employee Leasing?

An Employee Leasing firm hires your employees and leases them back to you. You will still select your own employees however they will be reported to the government as employees of the leasing company. Some leasing companies will offer you their SUTA rate as a savings incentive however remember that only applies to the first $7,000 of earnings per employee. Leasing companies will process worker’s compensation claims for you, however they still have to gather all the necessary information from the source (you). In addition Leasing companies will offer medical benefits however they often will require you to pay for a portion of those benefits for each employee. The Leasing Company will offer many benefits at a premium cost usually calculated as a percentage of gross wages.