Understanding Employee Compensation vs. Employer Costs
In the United States, Companies are required to pay additional taxes on top of an employee's stated salary or wages
(This is different from some countries (like India) where "Cost to Company" (CTC) includes both the employee's compensation and the employer's tax obligations)
For example, if you offer someone a $100,000 annual salary in the US, your actual cost as an employer will be approximately $107,650-$115,000 after including mandatory employer taxes and benefits (if offered).
Employer Tax Obligations
As an employer in the US, you are responsible for:
Withholding taxes from employee paychecks
Paying additional employer taxes separate from employee wages
Filing and reporting all employment taxes to federal and state agencies
Company Taxes (on top of employee wages):
Social Security Tax (FICA): 6.2% of wages up to the annual wage base limit ($168,600 in 2024)
Medicare Tax: 1.45% of all wages with no cap
Federal Unemployment Tax (FUTA): Generally 0.6% on the first $7,000 paid to each employee annually
State Unemployment Insurance (SUI): Varies by state, typically 2-5% of wages up to a state-defined limit
If you'd like to read more on the above taxes, a good place to start is the official IRS guide here
Employee Taxes
Federal Income Tax: Based on employee's W-4 form and IRS withholding tables
Social Security Tax: 6.2% of wages (matching the employer portion)
Medicare Tax: 1.45% of wages (matching the employer portion)
Additional Medicare Tax: 0.9% on wages over $200,000
State Income Tax: Varies by state
Local Income Tax: Varies by locality
Important Distinctions for New Employers
Salary vs. Total Compensation Cost: When you offer someone a $100,000 salary, your actual cost as a business will be higher due to employer taxes.
Employer Taxes vs. Employee Benefits: Employer taxes are separate from health insurance, retirement plans, and other benefits you might offer. Benefits are additional costs beyond mandatory taxes.
Medicare and Social Security: These are government-mandated taxes unrelated to any private health benefits or 401(k) plans you might offer employees.
Tax Withholding vs. Tax Payment: As an employer, you both withhold taxes from employee paychecks AND pay your own taxes directly.
Example of Employer Costs
For an employee with a $100,000 annual salary:
Employer Social Security: $6,200 (6.2% of $100,000)
Employer Medicare: $1,450 (1.45% of $100,000)
Federal Unemployment: $42 (0.6% of first $7,000)
State Unemployment: ~$2,500 (varies by state)
Workers' Compensation: ~$500-$1,000 (varies by industry)
Total Employer Cost: ~$110,192-$111,192
How Warp Simplifies Payroll Tax Compliance
Warp manages all aspects of payroll tax compliance for you:
Automatically calculates and withholds the correct amount from employee paychecks
Calculates and sets aside your employer portion of taxes
Handles all tax filings and payments to federal, state, and local agencies
Manages state tax registrations and accounts
Takes care of year-end tax forms like W-2s and 1099s
Provides support for any tax notices you might receive
FICA/Medicare Exemptions for Non-US Citizens
Non-US citizens working in the United States may be exempt from Social Security (FICA) and Medicare taxes in certain circumstances. This can significantly reduce the tax burden for both employers and employees.
Who Qualifies for FICA Exemptions?
Non-Resident Aliens on specific visa types, including:
F-1 visas (students)
J-1 visas (exchange visitors)
M-1 visas (vocational students)
Q-1 visas (international cultural exchange visitors)
H-2A visas (temporary agricultural workers)
Employees from countries with Totalization Agreements with the US:
These bilateral agreements prevent double taxation for Social Security
Workers remain covered by their home country's social security system
Current agreements exist with 30+ countries including Canada, UK, Japan, Germany, and France
Documentation Required for FICA Exemptions
To properly apply FICA exemptions, employers must collect and maintain:
Form I-9 and copies of visa documentation
Valid I-94 record showing current status
Important Considerations
FICA exemptions are time-limited for certain visa categories (typically 2-5 years)
Students and scholars may become "resident aliens" for tax purposes if they stay in the US long enough
The exemption applies only to FICA taxes - federal and state income tax withholding is still required
Misclassification can result in penalties and back taxes
How to request FICA and Medicare Tax Exemption in Warp
To apply tax exemptions in Warp
The employee must create a tax exemption request (this can be done from the Employee app dashboard here)
The Employer must approve this exemption request from the admin dashboard (here)
Once the request has been approved, it takes Warp 1 business day to apply the requested exemptions to the employee and company account.
FAQs
Q: Are "company taxes" part of an employee's compensation package?
A: No. In the US, employer taxes are separate from and in addition to an employee's stated salary or wages. When you offer someone $100K, that's what they receive before their personal tax withholdings.
Q: Are Medicare and Social Security taxes related to health benefits?
A: No. These are government-mandated taxes that fund federal programs. They are completely separate from private health insurance or retirement benefits you might offer.
Q: How do I know how much to budget for an employee?
A: As a general rule, budget approximately 7-11% above the salary for mandatory federal taxes, plus state unemployment insurance (varies by state).