How Payroll Taxes Affect Your Bottom Line
As a business owner, payroll isn’t just about writing checks—it’s about managing your financial responsibilities to both your employees and the government. One of the most overlooked areas of business expense is payroll taxes—and they can have a major impact on your cash flow and overall profitability if not handled properly.
Let’s break down what payroll taxes are, how they work, and what you should be doing to manage them wisely.
What Are Payroll Taxes?
Payroll taxes are the federal, state, and local taxes that both employers and employees are required to pay on wages. These taxes help fund government programs like Social Security, Medicare, and unemployment insurance.
There are two sides to most payroll taxes:
- Employee Withholding – This comes out of each employee’s paycheck and includes:
- Federal income tax
- State income tax (if applicable)
- Social Security (6.2%)
- Medicare (1.45%)
- Employer Contributions – As an employer, you match certain amounts:
- Social Security (6.2%)
- Medicare (1.45%)
- Federal and state unemployment taxes (FUTA and SUTA)
The Real Cost to Your Business
Payroll taxes increase the actual cost of hiring employees. For example, if you pay an employee $50,000 a year, you’re also paying an additional amount in taxes—often totaling 7–10% more in payroll expenses.
Here’s what that means for your bottom line:
- Reduced cash flow – These taxes must be deposited on time, often semi-weekly or monthly. That can create a strain on your cash reserves.
- Penalties for late or incorrect payments – The IRS takes payroll tax compliance very seriously. Mistakes can lead to costly fines, interest, or even legal trouble.
- Administrative burden – Managing payroll taxes manually can be time-consuming and error-prone, especially as your team grows.
How to Stay in Control
Want to protect your business finances and stay compliant? Here’s what we recommend:
- Automate Your Payroll
Use a reputable payroll service or accounting professional to ensure accurate calculations, timely payments, and proper tax filings. - Budget for Taxes
Don’t forget to factor in payroll taxes when forecasting cash flow and planning employee compensation. - Understand Your Deadlines
Federal payroll tax deposits are usually due semi-weekly or monthly. Year-end filings (like W-2s and 940/941 forms) have strict deadlines too. - Work With a Pro
Partnering with a trusted CPA or payroll expert ensures you avoid penalties and keep your books clean.
What This Means for Your Business
Payroll taxes are a necessary part of doing business—but they don’t have to be a burden. With smart planning, accurate withholding, and professional support, you can manage them smoothly and protect your bottom line.
At Velin & Associates, Inc., we help business owners simplify payroll and stay compliant—so you can focus on growth, not government forms.
📞 323-902-1000
📧 dmitriy@losangelescpa.org
🌐 www.losangelescpa.org
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.