Payroll taxes: Cost of hiring an hourly worker in California in 2020
Disclaimer: The information provided in this article is for informational purposes only and does not constitute legal advice.
As someone who owns a business in California, if you are planning to hire a new hourly worker, it can have a significant effect on your finances. It's true that your new hire will help you make money and bring skills to the table that will help you. However, you need to carefully calculate whether you can afford to pay their wages as well as the other costs associated with them. Along with the person's wages, you are also responsible for paying their payroll-related taxes, benefits, and the miscellaneous costs of recruiting and training them.Payroll related taxes can be confusing- some taxes are deducted from a worker’s wages, whereas other taxes are charged directly to the employer. In this article, we have clarified these taxes, while classifying state and federal taxes that you and your workers owe.
Taxes paid for by the employer
1. California unemployment insurance
Category: CA State Tax
California SUTA (State Unemployment Tax Act) is 1.5-6.2% on the first $7,000 in compensation paid to every worker annually. SUTA does not exceed $434 per employee per year.
2. Employment Training TaxCategory: CA State TaxCompanies responsible for ETTs pay 0.1 percent on the first $7,000 in compensation that they pay to each worker every year. ETTs do not exceed $7 per employee per year.
3. Social Security Tax
Category: Federal TaxThis tax is split between the business owner and the worker. Businesses are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.
4. Medicare Tax
Category: Federal Tax
This tax is split between the business owner and the worker. Businesses are charged 1.45 percent of the workers’ wages.
Taxes paid for by the employee (withheld from wages)
1. State Disability Insurance Tax
Category: CA State Tax
As of 2020, the state disability insurance tax rate is 1 percent of an employee's state disability taxable wages. As their employer, you are expected to withhold a percentage from the first $122,909 in wages that you pay each worker every year.
2. Social Security Tax
Category: Federal Tax
This tax is split between the business owner and the worker. Workers are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.
Category: Federal tax
This tax is split between the business owner and the worker. Workers are charged 1.45 percent of their compensation.
4. Additional Medicare Tax
Category: Federal tax
Workers who make more than a certain income amount (varies by filing status) are subject to an additional medicare tax of 0.9%. Employers are expected to withhold this tax from the workers' wages, if they exceed $200,000 per year.
5. Federal Income Tax
Category: Federal tax
The federal income tax is determined by splitting a worker's taxable income into separate portions or 'tax brackets'. Each portion is taxed at the rate that corresponds to it. Currently, this rate ranges from 10% to 37% of one's income.
6. California Personal Income Tax
Category: CA State Tax
This tax is withheld from employee wages and is based on each employee’s tax withholding selection on Form W-4 or DE 4. Currently, this rate ranges from 1% to 13.3% of one's income.
A preview of Form W4
A. California unemployment insurance
If a worker loses their employment through no fault of their own, for example, due to a layoff, they receive cash through their unemployment insurance. The unemployment insurance gives them an income until they find a new job again.California SUTA (State Unemployment Tax Act) is 1.5-6.2% on the first $7,000 in compensation paid to every worker annually. A ceiling to this tax is set at 6.2 percent or $434 per employee per year. Because of this, after a point, the percentage of unemployment insurance tax you would owe on a worker's wages would go on decreasing as their yearly wages increase. This tax is reviewed every December.This rate is determined by California and can vary based on the year your organization was established. You will be expected to pay 3.4 percent for the initial couple of years. However, this rate will increase over time. The rate also varies based on a few other factors, including the number of people that work for you and the unemployment benefits that were charged to your account.
B. Employment Training Tax
California believes that investing in training your crew can bring exceptional returns to your organization as well as to other businesses in the state. Along with strengthening the businesses themselves, training has an indirect impact on the state's economy, too. Therefore, the employment training tax (ETT) offers funding to companies in certain industries to assist them in training their workers.Just like unemployment insurance, ETTs are paid by business owners. Companies responsible for ETTs pay 0.1 percent on the first $7,000 in compensation that they pay to each worker every year. A ceiling to this tax is set at $7 per employee per year. You will owe ETT to the state by default during your first year as a business owner. After your first year, if your UI reserve account balance is positive, you will continue to pay the ETT to the state.
C. State Disability Insurance Tax
The aim of the state disability insurance is to help people with temporary or permanent disabilities who are unable to work by providing them an income. This insurance also covers Paid Family Leave benefits, which provide an income to workers who are unable to earn as they are caring for a newborn child or a sick relative.State disability taxes are calculated a bit differently from employment training taxes and unemployment insurance taxes. They are deducted from the workers’ wages, and companies are required to withhold a specific percentage of state disability insurance from the first $122,909 in wages that every employee earns in a year.As of 2020, the state disability insurance tax rate is 1 percent of an employee's state disability taxable wages. The California State Legislature is responsible for calculating the tax amount every year. Currently, the highest state disability insurance tax is $1229.09 for each employee each year.[caption id="attachment_812" align="aligncenter" width="1024"]
D. Social Security
This federal insurance program is aimed at providing a pension to retired and disabled workers. The Social Security tax pays for the retirement, disability, and survivorship benefits that millions of Americans receive each year under the Old-Age, Survivors, and Disability Insurance (OASDI) Program—the official name for Social Security in the U.S.Businesses as well as workers are required to pay 6.2 percent of taxable wages on the first $137,700 as of the year 2020.
Medicare is a health insurance run by the federal government, meant for people over 65 years of age, and people with disabilities, regardless of their age. Business owners as well as workers owe 1.45 percent of a worker's compensation.Social Security and Medicare together are also referred to as Federal Insurance Contributions Act or FICA for short.
F. Additional Medicare Tax
Workers who make more than a certain income amount (varies by filing status) are subject to an additional medicare tax of 0.9%. Employers are expected to withhold this tax from the workers' wages, if they exceed $200,000 per year, irrespective of the worker’s filing status, or income from another source. It is possible that the worker ends up owing more amount than was withheld by the employer, depending on factors such as their filing status and additional income. In that case, the worker should make estimated tax payments and/or request additional income tax withholding using Form W-4.
G. Federal Unemployment
This tax is also referred to as Federal Unemployment Tax Act, or FUTA for short. The Department of Labor, which is a federal division, oversees state programs that provide unemployment benefits to people who are let go from, or have lost their jobs due to events beyond their control. They must also meet certain other requirements to be eligible for unemployment benefits. After accounting for federal tax credits, 0.6 percent of effective federal unemployment tax is levied on the first $7,000 that you pay your workers as their taxable compensation. (Non-taxable income including parking reimbursements, travelling allowance and other payments do not levy any FUTA.)
H. Federal Income Tax
Just like the state government, the federal government levies a separate income tax on workers' wages too. The funds collected from this tax are used to pay for national programs, including the national defense, veterans and foreign affairs, social programs, physical, human, and community development, law enforcement, and to pay off the interest on USA's debt. The federal income tax is determined by splitting a worker's taxable income into separate portions or 'tax brackets'. Each portion is taxed at the rate that corresponds to it. Let's say a worker made $40,000 in the entire year, and they are a single tax filer. For the year 2020, they will be charged a 10% federal income tax on the first $9,875 they make, whereas 12% on the rest of their income. Because of the way tax brackets work, the federal income tax is easy to determine for exempt employees who make a fixed income during the financial year, regardless of the number of hours they work. However, things start getting tricky when it comes to hourly workers. Currently, this rate ranges from 10% to 37% of one's income.
I. California Personal Income Tax
Employees who earn their income in the state of California, whether they are residents or not, owe a personal income tax to the state. This personal income tax is withheld from their wages. The tax amount is calculated with the help of their Form W-4 or DE 4. Unlike the state disability insurance tax, employment training tax, and unemployment insurance tax, there is no ceiling set on personal income tax. With the help of the money that the state gathers through personal income taxes, they improve public services and amenities like roads, health programs, schools, and public parks.Like the federal income tax, the California Personal Income Tax is determined by splitting a worker's taxable income into separate portions or 'tax brackets'. Each portion is taxed at the rate that corresponds to it. For example, if a worker makes $18,544 in wages in a year, he will be charged a 1% CA personal income tax on the first $8,544, and 2% on the remaining $10,000 of his wages.Currently, this rate of California Personal Income Tax ranges from 1% to 12.3% of one's income, plus a 1% surcharge on taxable incomes of $1 million or above.