Pay increases and payroll taxes

Your employees are very important to your business. They can have a big effect on whether families choose your child care program and stay with you. Good employees can help you get and keep families. Bad employees can drive families away and hurt your reputation. Parents want child care they can trust with dependable staff more than ever. Also, if you invest in your employees, you may be able to fully staff your business or even hire more people. This can allow you to safely increase the number of children you care for and make more money. Investing in your employees can help you offer better care to families and help your business grow.

Right now, there are two important things to know about the job market. First, many workers have left their jobs during the pandemic or have stopped working altogether. This has caused staffing shortages across the country. Without enough money or good employee benefits, it can be hard for employers to attract the best people. To be competitive with other child care programs, it is smart to think about paying your employees more.

This will not only help you find and keep good employees, but it will also help with the second biggest problem in the child care industry right now: making sure child care workers earn enough to live on. Many child care workers are leaving their jobs for other jobs that pay better. This is especially true in child care, where wages have been low for a long time. Because of this, it is important to think about giving temporary pay raises and bonuses to attract and keep good employees in a difficult job market. It is also important to address the long-term problem of low salaries for child care workers.

When you think about giving your employees more money, there are different ways to do it. These include bonuses, temporary pay raises, and long-term or permanent pay raises. Each type can affect your employees and your business differently. The first thing to do is decide what kind of pay increase you want to offer. 

Bonuses  

A bonus is a payment given once as a single amount of money. It raises your employees' total income, but you do not have to give more bonuses later. Bonuses can help you attract new employees or keep the ones you have and thank them for working hard. For example, you might give a new employee a bonus when they are hired or after they have worked for you for six months. You could also give bonuses when employees need them most, such as before holidays, at the start of summer, or for working evenings or other unusual hours. Bonuses are also a great way to thank employees who have done more than expected, like when they worked during times when you were short-staffed or worked in difficult situations. This can really improve how employees feel about their jobs.

Temporary pay increases  

A temporary pay increase means you raise your employee's salary or hourly wage, but only for a short time. There is a specific date when the pay will go back to normal. For example, you could thank two employees who worked hard during the pandemic by raising their pay for the next year. These employees would know that their pay will return to the original amount when the temporary pay raise ends.

Long-term pay increases  

 Long-term or permanent pay increases mean raising an employee's salary or hourly wage for good. It is considered a raise to their regular pay, and there are no plans to lower it later. Employees like this kind of increase because it means they will have more money for a long time. For employers, this kind of pay increase can help your business stay competitive and keep employees. However, employers need to make sure they can afford it for the long run. 

When you think about giving your employees more money, especially when hiring new people, it is important to look at your current pay levels to avoid a problem called wage compression. This happens when employees who have worked for you for a long time make less than new employees in the same job. Wage compression can occur when there are not enough employees to fill open jobs. This can lead to new hires getting paid more than current employees doing the same work. This often happens when your rules for deciding pay are old, too general, or not clear. Wage compression can cause problems between new and current employees and make it hard to keep your current employees.

To stop this from happening, it is a good idea to create a clear pay scale. This will help make sure everyone is paid fairly. It is a good habit to check your pay scale at least once a year and whenever you hire new people. You can compare your pay to what other child care businesses in your area are paying by looking at up to ten job postings for similar jobs. Some websites also let you easily search for the average salary for different jobs in your area and compare them to national rates. Your pay scale should consider your employees' education, skills, and experience, along with the responsibilities of their job.

To begin:  

•  Write down a list of all the jobs in your organization. Include the important skills and what each person is responsible for in their job
• Look at each job based on the needed skills, certifications, responsibilities, and role. Then, rank them in order of importance.
• Group positions of similar ranking together in tiers 
• Find out how much other businesses in your area pay for similar jobs. This will help you find the average pay for each level of job in your organization.
• For each level of job, create a pay range. The lowest pay (for those just starting) should be 75-80% of the average pay for that job in your area. The highest pay (for those with a lot of skills) should be 120-125% of the average pay in your area.
• Look at each employee's skills, how long they have worked for you, and their experience. Decide if they should be paid at the entry-level, average, or highly skilled level within their job category. 

 When you think about raising employee pay, whether for a short time or a long time, it is important to know how much it will cost. This way, you can be ready to pay those costs as a business owner. To figure out how much more it will cost to raise employee pay, you need to compare your current costs with the new costs. This includes both the amount you pay employees and the payroll taxes you have to pay. 

Calculating current costs  

1. Current Wages. To begin, calculate the current wages that you pay your employee each week based on the following calculation:  

Total hours worked per week x current hourly rate = Current wages per week  

For example, let’s say that you have one full-time employee that currently earns $10 per hour.  

40 hours per week x $10 per hour = $400 (current weekly wages)  

2. Current Payroll Taxes. As an employer, you will also need to be aware of the increase in payroll taxes that comes with this increase in pay that you will be required to pay. Currently, employers in the state of Texas owe the following taxes: 
   1. Federal Insurance Contributions Act (FICA) Taxes: 
      1. 6.2% Social Security Tax (withheld on the first $142,800 an employee makes in 2021) 
      2. 1.45% Medicare Tax (withheld on all of an employee’s wages) 
   2. 6% Federal Unemployment Tax Act (FUTA) Tax (withheld on the first $7,000 an employee makes in 2021) 
   3. 0.21% Texas Unemployment Insurance (UI) Tax (Pandemic Stabilization Rate withheld on the first $9,000 an employee makes in 2021)   

To calculate payroll taxes, use the employee’s wages multiplied by the tax percentage:  

• Current wages x 6.2% (0.062) = Social Security Tax 
• Current wages x 1.45% (0.0145) = Medicare Tax 
• Current Wages x 6% (0.06) = FUTA Tax 
• Current Wages x 0.21% (0.0021) = Texas UI Tax  

Using our previous example, here is how you would calculate payroll taxes for a full-time employee paid $10 per hour:  

Current taxes:  

• $400 x 6.2% Social Security Tax (0.062) = $24.80 
• $400 x 1.45% Medicare tax (0.0145) = $5.80 
• $400 x 6% FUTA Tax (0.06) = $24.00 
• $400 x 0.21% Texas UI Tax (0.0021) = $0.84 

Total: $55.44 taxes per week  

3. Total Current Costs. To calculate total cost, you need to combine the total wages paid to your employee with the payroll taxes owed on those wages. Using our same example, you will see that the total current cost is $455.44 per week: 
   1. $400 (total wages) + $55.44 (total payroll taxes) = $455.44 (total cost)  

Calculating increase in costs 

Now that you know your current costs, you will need to calculate the new costs after you have raised your employees rate of pay.   

Let’s say that you want to raise your full-time employee’s rate of pay from $10 per hour to $12 per hour. You already know the total weekly cost associated with $10 per hour, so now you will need to make the same calculations using $12 per hour as your rate of pay:  

1. Calculating New Costs.  

New Wages: 40 hours per week x $12 per hour = $480 total wages per week  

New Taxes:  

• $480 x 6.2% Social Security Tax (0.062) = $29.76 
• $480 x 1.45% Medicare tax (0.0145) = $6.96 
• $480 x 6% FUTA Tax (0.06) = $28.80 
• $480 x 0.21% Texas UI Tax (0.0021) = $1.01  

Total: $66.53 taxes per week  

Total New Cost:  $480 (new wages) + $66.53 (new taxes) = $546.53 (new cost)  

2. Difference in Old vs. New Costs. Now, you have the total current cost ($455.44) and the total new cost ($546.53). To determine your total increase in weekly costs to raise one full-time employee from $10 per hour to $12 per hour, subtract the current costs from the new costs:  

$546.53 (new costs) - $455.44 (current costs) = $91.09 (increase in costs)  

This means that the total employer costs per week increases by $91.09, when giving this employee a $2 per hour raise, or $4,736.68 per year (multiplying weekly costs by 52 weeks in a year).   

Use these steps or our Payroll Tax Calculator to better understand the increase in costs associated with raising employee compensation.

Bonuses or short-term pay increases  

When raising employee pay, it is important to be ready to handle these costs as part of your business expenses. Whether it is for one-time bonuses or pay raises for a short time, you need to have the money ready when it is time to pay. When figuring out how much to withhold for bonuses, know that one-time payments can be taxed in two ways. First, you can calculate the taxes owed on your employee’s bonus using a flat percentage of 22% for extra pay, no matter what your employee's income tax rate is. This is easiest when you pay your employee in a separate payment from their regular wages:

$1000 bonus x 22% = $220  

Second, you can combine their bonus with their regular pay. In this instance, you can treat the combined amount as if it were one payment and calculate the payroll taxes the same as you would for regular pay:  

$1000 bonus + $1200 paycheck = $2200 combined payment  

Payroll taxes:  

• $2200 x Social Security Tax 6.2% (0.062) = $136.40 
• $2200 wages x Medicare Tax 1.45% (0.0145) = $31.90 
• $2200 x FUTA Tax 6% (0.06) = $132.00 
• $2200 x Texas UI Tax 0.21% (0.0021) = $4.62 
• TOTAL payroll taxes on combined payment = $304.92  

To calculate the amount of payroll taxes owed on the $1000 bonus specifically, execute the same calculations using $1000 as the total wages:  

• $1000 x Social Security Tax 6.2% (0.062) = $62.00 
• $1000 wages x Medicare Tax 1.45% (0.0145) = $14.50 
• $1000 x FUTA Tax 6% (0.06) = $60.00 
• $1000 x Texas UI Tax 0.21% (0.0021) = $2.10 
• TOTAL payroll taxes on bonus portion of payment = $138.60  

When calculating withholding amounts for bonuses when combined with regular pay, you would combine the payroll tax amounts with the federal income tax withholdings per your employee’s withholding rate.   

Once you have determined the amount that will be owed for payroll taxes, estimate how much you will need to set aside to ensure you have funds available when the time comes. This can be as simple as taking the amount that you anticipate owing and dividing it by the time period that the wage increase will cover. To use our previous example, raising a full-time employee’s pay by $2 resulted in a new weekly cost of $546.53, which is $28,419 per year. This means that this employer would need $2,368.29 per month to cover the total costs of this employee with their new salary. While this may seem like a lot in total, the increase was $394.71 per month, or a 17% increase. In this case, you would need to plan to set aside at least an additional $394.71 each month to ensure that you are able to cover those additional costs.

Disclaimer 

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.