So You Want To Run A Business - Payroll Tax Breakdown

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I recently set up Payroll via Paychex for my company. It is an eye opener to see exactly what taxes an employer pays on top of the taxes already deducted from each employee’s paycheck. I mean, I always heard that my employers were paying taxes for me when I was an employee, but I never knew how much. Till now.

This is helpful when figuring out your total compensation as it is part of the hidden cost of going into business for yourself. Of course, we are a C-Corp so these figure may be different for other types of businesses. I wouldn’t know and this does not qualify as tax advice.

Tax Breakdown

Tax Rate
Social Security 6.2%
Medicare 1.45%
Federal Unemployment 0.8%
State Unemployment 0.8%

State of CA. This changes.

Some Notes:

Social Security has a wage base limit of $94,200. So if an employee makes more than that (including bonuses etc…), the employer will only be taxed 6.2% of $94,200.

Medicare has no wage based limit.

The last two taxes are only taxed on the first $7000 of wages per employee per year. So the employer pays 3.4% of $7000 for each employee assuming each makes $7000 or more a year.

So make sure these figure into your cash-flow estimates. Also, don’t forget that by law, most companies are required to carry Workman’s compensation insurance. That will cost you a small chunk of change per year as well.

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2 responses

  1. Avatar for Eber Irigoyen
    Eber Irigoyen May 10th, 2006

    how about outsourcing work offshore? how does that work? any pointers?
    I'm starting a new business and we're looking into this

  2. Avatar for bonna
    bonna May 10th, 2006

    A month ago some Belgian magazine pointed out that Belgium is the #1 country in the world to pay additional taxes on employee wages payed for the employer. The average ratio is 51%, that means that it costs an employer 151 usd to give the employee a 100 usd (bruto) raise.
    On top of that the employee's paycheck is taxed at an average of 46%. This means the employee is left with 64 usd.
    Sigh, sometimes I wish I lived in the US ;).