Payroll and Unemployment Taxes

Payroll and Unemployment Taxes

FICA Taxes

Federal Insurance Contribution Act (FICA) refers to Federal Social Security and Medicare taxes that are required to be withheld from employees’ wages. The social security tax rate is 12.4% and the Medicare rate is 2.9%. Half of this amount is withheld from an employee’s paycheck and the other half is paid by the employer.

FICA Refunds

The Internal Revenue Service (IRS) allows employers of household employees to request a refund of the FICA and Medicare taxes paid to employees who earned less than $1,800 during the calendar year. Concurrently, the IRS allows employees of household employers to receive all of their withheld taxes (including FICA, federal withholding, and state withholding) back at the end of the calendar year if they made less than $1,800 in gross wages (3). After the last payroll of the year is finished, our office reviews the year’s wages for all employees and refunds the taxes to those who make less than the limit set by the IRS. Those employees don’t receive a W-2 and do not need to report their wages and taxes on their individual income tax return (3).

Federal and State Withholding

Household employers are not required to withhold federal or state income taxes. In practice, however, they are normally withheld. When a new employee is hired they must complete a Form W-4. On this form they indicate their income tax filing status (single or married) and the number of exemptions they are claiming. The more exemptions, the less tax is withheld. It is important that employees have adequate taxes withheld when they work for multiple employers.

Unemployment

Who pays it?

Employees do not pay unemployment tax; this burden is solely on the employer. By both Michigan and Federal law, a domestic employer is only liable for unemployment taxes if they pay $1,000.00 or more in gross wages in a calendar quarter (3, 4). If this occurs, the employer is liable for both Federal (FUTA) and State Unemployment Taxes (SUTA) (3, 4). Furthermore, once liable, an employer must continue to pay unemployment taxes for two years after the date they became liable, regardless of the amount of their payroll.

How much is the tax?

The tax rate for FUTA is .6%. It is only charged for the first $7,000.00 in gross wages an employee makes during the year (4). Therefore, the maximum amount of FUTA per employee is $42 (4).

The tax rate for SUTA can vary, with the standard beginning rate for employers at 3.36% (5). This rate changes each year based on whether unemployment benefits have been paid. If benefits have been paid, the rate will likely increase the following year, and decrease if benefits have not been paid. SUTA is charged for the first $9,500 in gross wages an employee makes during the year (5). For example, if an employer has three employees making $12,000 each during the year, this creates a total of $36,000 in wages. Since SUTA taxes the first $9,500 of each employee’s wages, only $28,500 of that amount would be taxable.

How does an employee file a claim?

An employee must contact the Unemployment Insurance Agency (UIA) during their first week of unemployment (6). The unemployed worker should visit the UIA website at www.michigan.gov/uia. Alternatively, the worker can call the UIA toll-free at 1-866-500-0017. Keep in mind that you must call at the time scheduled by the last two digits of your Social Security Number. Check the UIA website for details.

Sources:

(1) Wage & Hour Division, Michigan Department of Labor and Economic Growth (DLEG), (2) Federal Fair Labor Standards Act (FLSA), (3) IRS Publication 926 – Household Employer’s Tax Guide, (4) IRS Publication 15 – Employer’s Tax Guide, (5) Michigan Employment Security Act (MES), (6) UIA Fact Sheet #36 – Claiming Unemployment Benefits in Michigan