Hi Guys, Brandon Davis with Davis CPA Group here with another video in regards to some things I get asked about a lot. Today we’re gonna talk a little bit about payroll and I’ve got some numbers already on the board here and we’re going to chat through what that means. A lot of times, when I work with my clients, and they’re startup businesses and they’ve just kind of been themselves or maybe it’s themselves and their spouse working on the business. They decide they need some help. And so they start looking at the idea of hiring employees and getting more assistance in doing their service or providing their product.
And so one of the things that we look at is what’s the cost of having employees? You know, there’s a lot of numbers out there, I think, about what it really costs to have an employee work for you. And so I want to kind of talk through what that looks like and then what some of the filing requirements are to have an employee. So, in this little scenario here, I kind of wrote some numbers on the board to save time. I’m looking at a scenario where if we were to hire someone and pay them $20,000 a year, what would that look like from a standpoint of what it costs the employer? You know, payroll taxes is, is one of the things that people hear about and, “Gosh, well if I hire this employee and I pay him x amount of dollars and I’ve got all these extra taxes I’ve got to pay. And I think there’s just a misconception of what it really costs to have an employee work for you.
So we’re going to walk through a little bit about some of the taxes that impact the employer, not necessarily the employee at this point. And so the employer, meaning the person employing the the person that’s going to provide the services to the company, is responsible for some level of taxes. Now, the three major taxes that are paid on wages … And, again, our fact pattern here, we’re using $20,000 of wages. You have payroll taxes, which are basically your FICA and Medicare taxes. Those are the two things that you like … If you look at your W2, you’ll see the word FICA and the word Medicare on there. And they’re two different types of taxes, but that total tax amount is 15.3%. Now, one of the things I need to point out here, this 15.3% is both the employer and employee costs at this point. And so the 15.3% that’s collected and submitted to the Social Security … or to the IRS to cover your Social Security taxes and your Medicare taxes. That full amount is the employer’s responsibility to withhold from the employee’s check.
And so you basically, of the 15.3, 7.65% gets withheld from the employee’s wages. Or taken out of this $20,000 that’s paid annually, out of their wages and sent into the IRS. And then the employer must match 7.65% of the total 15.3 that’s taken out to [inaudible 00:02:52] also. And so the true cost to the employer is really half of that $3,060, or $1,530. So I want to kind of do that down here. So $1,530 in what I’ll call payroll taxes, which would be your FICA and Medicare. And then there’s two other levels of tax that oftentimes people don’t realize. There’s state unemployment taxes, that’s what this SUTA represents. And federal unemployment taxes, that’s what FUTA represents. Now these are additional costs to the employer to have the employee.
In Missouri, and we’re gonna work on that because that’s where my practice is based, the base rate for state unemployment tax is 2.511%. Now that’s for new employers. This rate can fluctuate. It can actually go down based on the experience of the company. Meaning how many people have they turned over in their business, that are claiming unemployment benefits, or how many people … or the type of industry they’re in. Maybe they’re in an industry that has got a high level of turnover or high level, maybe, injury rates or things of that nature that might impact their turnover. And so that can impact that rate a little bit. But the base rate for startups is 2.5%. FUTA … And that’s paid on the first $12,500 in wages. And so there’s limits on some of these taxes as well.
On the FUTA tax, the federal unemployment tax, it’s paid 6% on the first $7,000 in wages. And so you add these in, as well. You’re looking at $314 then on $12,500. Once they hit $12,500 you stop collecting SUTA tax on that particular employee. Again, these taxes here are done on an employee-by-employee basis. On the FUTA tax, it’s 6% onto the first $7,000 in wages. So, I’m making $20,000, it’d be $420. And so we’d add in the $420 down here and the $314. So, once you then look at the total cost of the employee to the employer, we take our payroll taxes of $1530, our $420 for federal unemployment taxes and our $314 for SUTA taxes. And that’s four, six, 12 … $2,264 is the total annual cost for the employer to have an employee making $20,000 a year.
Now there’s other costs that, you know, think about when you bring on employees like worker’s compensation insurance. That’s something I recommend. That’s not really a tax. That’s something that I get asked a lot. “Well, I’ve got these payroll taxes and the unemployment taxes and I got work comp …” But work comp is not really a tax, it’s an insurance benefit. It’s a benefit that you have, that you pay an insurance company to provide coverage. Where, if someone gets hurt on the job, then those benefits kick in to help either pay for the medical expenses that might be associated with being hurt on the job or paying them to be off work for a period of time while they’re being healed back up. So a work comp is something that I highly recommend even if it’s not required. It’s not always required if you have a limited number of employees, generally speaking it’s less than five. But I always recommend that you have a work comp coverage in place as well.
So this is just kind of a high-level snapshot. Now the other thing to think about too, that we haven’t really talked about here, on the standpoint of payroll is on the employee side. Because the employee is going to have withholdings taken out of their check to help pay for their tax liability at the end of the year. Well that’s income tax withholding. That’s not a cost to the employer, because the employer’s cost are these costs we just discussed here: half of the $3,060, the SUTA and the FUTA taxes. That’s their true out-of-pocket cost. So there’s $20,000 in wages they’re paying to the employee, plus the $2,264, basically shows that the cost is $22,264 for that employee.
Now one of the things that you have to think about. Though, is when you write your check to your employee, you’re going to withhold 7.65% out of their wages here. And you’re going to withhold income taxes, federal and state both, out of the wages that you pay them. So their take-home pay … and this is just pulling numbers out of the air, just kind of make it … just to talk through how it actually works. Their take-home pay for the year may only be $18,000, or $17,500, but they got paid $20,000. Because that differential, that difference between the $17,500 and the $20,000 got paid into the state and to the IRS in the form of income tax withholdings that then they put on their tax return at the end of the year to give them credit towards the taxes that they’re going to owe. And also the payroll tax piece that they have to come out, that comes out of their payroll check. So, again, kind of a high-level analysis of looking at what it costs to employ somebody.