As a business owner, you’re probably predicting January’s payroll tax expense to be the same as December’s.
You didn’t hire anyone new, and everyone earns the same. So your payroll expenses shouldn’t change, right?
Unfortunately, that’s not the case.
The new year is here and with it comes skyrocketing employer payroll taxes.
And if you think I’m being dramatic…
I’m talking about a possible increase of thousands of dollars in added payroll taxes starting with your first paycheck of the new year.
And the worst part is that it hits at the most inconvenient time when you’re about to feel the cash-flow pinch from the slowdown during the January and February months.
So, why does Baron Payroll care so much that we had to dedicate an entire article as a word of warning?
Because with over two decades of experience working with hundreds of NY companies, we’ve seen how blind-sided owners are, and we don’t want that to be you.
So, bottom line.
If you’re a business in New York, come January 1st, your payroll tax expense will dramatically increase.
Do you have enough money in your bank account to cover this added payroll expense and avoid late fees and penalties?
Read on to find out why this happens and how to prepare.
Why Do My Payroll Tax Expenses Skyrocket Every Year in January?
When we think of January, many of us think of cold weather, credit card bills, and New Years’ resolutions. But with the beginning of a new calendar year, all year-to-date counters for payroll reset to zero.
Along with this comes the employer tax expense again for federal and state unemployment insurance that all employers must pay. The tricky part here is that these taxes are only paid on the first ten thousand or so of wages each employee earns.
The actual amount of wages and the tax rate vary from state to state. However, the point is that the tax expense restarts at the beginning of every year, and most business owners forget about this.
The biggest impact on the owners’ pocketbook at the beginning of the year comes from unemployment taxes. There are two types of taxes, federal (FUTA) and state (SUI). And keep in mind that in NY, SUI is more significant because the wage base and the rates are more extensive than FUTA.
What Is SUI?
SUI stands for State Unemployment Insurance. In New York, it is an employer-paid tax only, and your tax rate varies from 2.1 - 9.9% based on your SUI account balance with New York State.
In other words, the state looks at how much you paid in vs. how much your company paid out in unemployment claims and every year adjusts your SUI rate accordingly.
The more claims were paid out, the higher your SUI tax rate will be all the way up to the maximum rate of 9.9%. You only pay SUI on the first $12,300 each employee earns in the calendar year, then you’re done for the year.
So your SUI tax expense is front-loaded, and every company feels it most in the first quarter of the year.
What Is FUTA?
FUTA stands for Federal Unemployment Insurance. FUTA is an employer-paid tax (0.6%) also, and the employees pay nothing. Similar to SUI, after an employee earns $7,000 in wages, the employer stops paying FUTA tax for that employee for the remainder of the calendar year.
The Good News?
The good news is that most employers only have to pay SUI and FUTA taxes for a few months, and then you’re done.
For FUTA, you stop paying taxes after an employee earns $7,000.
And for SUI in NY, you stop paying taxes after an employee earns $12,300.
This means that while the unemployment taxes restart in January, you are probably done paying these taxes by April.
So, if your employees earn $50k per year by the end of March, they have made more than $12,300, and you no longer have to pay the SUI or FUTA taxes.
How Can I Prepare My Business For Increased Payroll Taxes?
Ensure you have enough cash flow available at the beginning of the year to cover these increases in your payroll taxes. Don’t get caught off guard.
Remember:
- You need extra cash for payroll taxes at the beginning of every year.
- When you budget, don’t straight-line the expense for payroll taxes. Instead, use a much higher number for the first three months than you do for the remaining months. Budget 20% of payroll to cover your payroll tax expenses for the first quarter (January, February, March). Then drop it to 10% for the rest of the year.
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