Paper Trails

Struggling with payroll taxes?

Managing your business’ payroll processes can keep even the most savvy of entrepreneurs up at night.  Things like paying employees timely, withholding proper deductions and managing compliance are all part of the equation.   Another area that has many small business owners feeling nervous are the dreaded payroll taxes.  Because of this nervousness, it is easy for many owners to struggle with payroll taxes.

At Paper Trails, we get it.  Managing your business’ payroll taxes can be daunting. You worry about making mistakes, facing penalties, or worse, legal issues. We understand those late-night concerns – “Am I doing this right?” “What if I mess up?” You’re not alone in this.  That is why we have put this article together.  In this guide, we will talk about why some business owners struggle with payroll taxes and how to best overcome that.  By the time you finish reading, you should be much more confident in your ability to navigate the difficult waters of payroll taxes. Let’s get started.

Understanding payroll taxes

Before diving into some common challenges, let’s start with the basics. Payroll taxes are the taxes you, as a business owner, need to manage on behalf of your employees. These include taxes that you withhold from your employees’ wages and those your business pays directly. It sounds straightforward, but the details matter a lot.

What do payroll taxes consist of?

Let’s look at the two areas that payroll taxes consist of:

  1. deducting a portion of your employees pay to pay the tax liability on their behalf. This includes:
    • federal and state income tax based on your employees W4 form.
    • the employee portion of social security and Medicare taxes.
  2. paying the company share of payroll taxes on each employee. This includes:
    • social security and Medicare taxes.
    • state and federal unemployment taxes.

Overall, most small businesses pay an average of 10% of employee wages in required payroll taxes on top of the wages they pay to employees. These taxes are divided up and cover a number of items.

Social Security & Medicare Taxes

The Federal Insurance Contribution Act, or FICA, began in the 1930s and is a law that states employees and their employers must make contributions to Social Security and Medicare programs. This Social Security & Medicare Tax is shared by an even 50/50 split between the employer and the employee.  The current total rate for this tax is 15.3% of employee wages.  The social security portion is currently 12.4%. Employees and employers each contribute 6.2% of wages to social security tax. The current Medicare portion of this tax is 2.9%. Employee and employers each contribute 1.45% of wages to Medicare tax.

Unemployment Taxes

There are two different types of unemployment taxes.  They are:

  1. Federal Unemployment Tax, FUTA.  This covers a portion of unemployment benefits at the federal level.  Businesses are required to pay 100% of this tax.  The current federal rate is 6% on the first $7,000 of wages paid to employees in a calendar year.  Many states have state tax credits, so businesses usually only pay 0.6% of employee wages to federal unemployment benefits.
  2.  State Unemployment Tax, SUTA.  This fund the unemployment trusts run by each state.  Each employer is “rated” by their state and issued a tax rate annually to contribute on behalf of each employee.  For Maine, unemployment tax is only paid on the first $12,000 in employee wages.

Common reasons why businesses struggle with payroll taxes

Business owners like you wear many hats.  You may face challenges with payroll taxes for a few reasons. And sometimes a simple mistake can have big consequences.  Below we highlight a few reasons why issues may occur.

Misclassification of employees

Misclassification of employees happens when a business mistakenly labels workers as independent contractors instead of W-2 employees. This distinction is important because it affects how workers are paid, their taxes, and their eligibility for benefits. For instance, two workers might do the same job, but only one receives health insurance and paid leave and their employer must withhold payroll taxes based on how they’re classified. The other does not receive these benefits and must pay self-employment taxes.

The guidelines for determining a worker’s status come from the IRS and labor laws, focusing on the employer’s control over the worker and the financial details of their job. Misclassifying employees can lead to problems like owing back taxes and penalties. It’s crucial for businesses to correctly classify their workers to avoid these issues and protect both the company and its employees.

Inaccurate payroll records

Inaccurate payroll records can create a host of issues for both businesses and their employees. When payroll information is not kept up-to-date or recorded correctly, it can lead to incorrect wage payments, tax withholdings, and contributions to employee benefits. This not only affects the financial well-being of employees but can also result in legal complications for the employer, including fines and penalties from tax authorities.

Keeping up with changing laws

Keeping up with changing payroll laws is essential for businesses to ensure they remain compliant and avoid potential issues. Payroll laws can evolve due to updates in tax rates, minimum wage adjustments, and changes in employee benefits regulations, among other factors. Failing to stay informed about these changes can lead to inaccurate payroll processing, resulting in underpaid taxes. Staying proactive in this area not only helps in maintaining compliance but also supports the overall well-being of the workforce.

Strategies to overcome payroll tax challenges

Working through the complexities of payroll taxes can feel overwhelming, but with the right strategies, you can turn it into a manageable part of running your business.

Use the right tools

Employing efficient payroll software or payroll services can significantly simplify managing payroll taxes. These tools are designed to automate calculations, ensure accuracy, and keep you compliant with current laws.  By automating these tasks, you can be sure that your payroll taxes are being handled correctly. It’s about choosing a payroll vendor that not only fits your current needs but can scale with your business, ensuring that no matter what happens, your business is ready to respond.

Stay informed

Tax laws can change, and these changes can sneak up on you if you’re not paying attention. Staying informed means actively seeking out updates, whether through subscribing to newsletters, attending webinars, consulting with tax professionals, or working with the right payroll provider. This proactive approach ensures you’re always prepared.

Educate your team

Ensuring everyone involved in payroll understands the process is crucial. Educating your team about the nuances of payroll taxes isn’t just about compliance; it’s about empowering them to make informed decisions and identify potential issues before they become problematic. Regular training sessions, workshops, and updates on changes in legislation can help your team stay on top of payroll requirements.


Tackling payroll taxes might seem daunting, but it’s not an insurmountable task. With a strategic approach and the right kind of help, it can become as straightforward and rewarding. That’s where we at Paper Trails come into the picture. We’re dedicated to offering you customized support, guiding you through every step of the payroll process. Let’s transform the complexities of payroll taxes into a seamless and enjoyable journey. With us by your side, navigating payroll taxes can be as easy and satisfying.  Contact our team here for help.