Is Workers' Comp Taxable? Plus 3 Unexpected Payroll Tax Costs

Are you managing your payroll taxes and workers’ comp correctly? An estimated twenty-six percent of small businesses leave themselves open to liability by lacking appropriate workers’ compensation processes and coverage. Are you in that number?

No part of running a small business is easy—least of all managing the nitty-gritty of payroll and workers’ compensation. Changing regulations, state-by-state requirements, and more can make understanding the rules challenging, let alone staying on top of them.

This post will provide you with vital information you need regarding payroll tax costs. And we’ll answer the question: Is worker’s comp taxable?

Is Workers’ Comp Taxable?

Let’s not beat around the bush. We’re ready to answer the first question you came to this post looking for: Is workers’ comp taxable?

The answer depends on a few clarifications, so let’s dive in. It is not taxable if you refer to the benefits paid to employees who file workers’ comp claims. The only exception is if the employee receives retirement benefits, SSDI, or SSI. In these cases, portions of those benefits may be taxable.

For employers, you may be able to deduct your workers’ compensation premium during tax filing. Work with your corporate tax specialist to ensure that your business can claim this deduction before doing so.

Workers’ comp regulations also vary by state, so you’ll need to reference your state’s requirements to ensure you’re following the requirements that apply to your area. It is also helpful to connect with a local insurance broker who is familiar with the requirements in your state to ensure you’re following the correct set of requirements.

Workers’ comp is notoriously tricky for small business owners, but it isn’t the only tricky thing you may encounter during tax season. Let’s look at some of the other unexpected payroll tax costs you should be aware of.

Standard Payroll Tax Costs

The first payroll tax cost you should be aware of as a small business owner is the cost of the standard taxes associated with operating your business and paying employees. You’ll need to take four standard payroll taxes into account:

Social Security: Social security is funded jointly by employers and employees. Your business must pay 6.2% of each employees’ wages up to $147,000.
Medicare: Similar to social security tax, you and your employees will pay a portion of Medicare taxes. You will be responsible for 1.45% of each employee’s wages.
FUTA: FUTA stands for Federal Unemployment Tax Act. According to this act, employers must pay a percentage of each employee’s wages up to a certain threshold. This percentage and threshold will vary based on your tax entity status.
SUTA: SUTA, or State Unemployment Tax Act, varies depending on your state. Check your state’s guidelines to ensure you’re preparing properly for SUTA taxes.

Payroll Tax Penalties

Another category of unexpected payroll tax costs for your small business is payroll tax penalties. You’ll face payroll tax penalties if you make specific errors while filing your taxes. The most common of these errors is paying your payroll taxes past the deadline.

If you don’t pay your payroll taxes on time, you’ll be subject to Late Payment Penalties. Under the late payment penalty, you must pay the following fees:

Up to 5 days late: 2% of your owed taxes
6 to 15 days late: 5% of your owed taxes
Over 16 days late: 10% of your owed taxes
Still unpaid more than 10 days after receiving first notice: 15% of your owed taxes

You can avoid these fees somewhat easily by taking some simple steps. Firstly, you’ll want to ensure that you set money aside ahead of time to budget for upcoming tax payments. This step ensures you have the funds needed when the due date rolls around.

You’ll also want to take steps to keep up with IRS announcements and policy changes. It can be challenging to keep up with all the regulations and deadlines, so you may also choose to partner with a payroll provider who can help you manage your payroll tax schedules and payments.

Self-Employment Taxes

The last category of unexpected payroll tax costs is self-employment taxes. If you are a business owner or an independent contractor, you will be responsible for all the standard payroll taxes normally split between the employer and their employees.

As a result, you will need to allot 12.4% of your salary in Social Security taxes and 2.9% for Medicare taxes on your own.

As a note, these figures only apply if you earn up to $147,000 annually. You’ll need to multiple any earnings over the base by 3.8% to pay additional Medicare taxes required for individuals at that income level.

Is Workers’ Comp Taxable? Learning the Ropes of Small Business Payroll

Processing payroll for your small business can feel overwhelming. Learning about unexpected payroll tax costs is only the beginning. You're not alone if you feel like you’re drowning in payroll processes and regulations.

Payroll is a challenge for many small businesses. That’s why we created our free resource, the Connected Guide to Small Business Payroll.

In the Connected Guide, you’ll learn about workers’ comp, benefits, taxes, and more. Get your copy of the Connected Guide today to take payroll from a headache to a streamlined process for your business.