Payroll Taxes: The Basics for Employers

Payroll taxes are taxes withheld by employers from employees’ wages and deposited on behalf of the employees and themselves to the appropriate tax authorities. As an employer, you are expected to collect and pay these taxes through your payroll process.

Payroll Tax Guarantees

U.S. federal payroll taxes consist of several components.

Calculating Federal Income Tax

These taxes are withheld from employees’ wages for the federal income taxes owed. The amount of federal income tax is determined based on the information employees provide on the W-4 form they complete upon hiring. Employees can change this form at any time and as often as they wish.

Social Security and Medicare Taxes

These taxes are known as FICA (Federal Insurance Contributions Act) and are shared between employees and employers. The employer deducts the employee’s portion, which equals half of the total amount owed, from employees’ wages, and the employer pays the other half.

Additional Medicare Tax

Employers must withhold the Additional Medicare Tax of 0.9% on employees’ earnings that exceed $200,000 (or $250,000 for married couples filing jointly). There is no matching by employers for this tax.

Federal Unemployment Tax (FUTA)

This tax will be paid separately from other taxes and will not be deducted from employees’ wages.

Self-Employment Tax

This is essentially the Social Security and Medicare tax for individuals who are self-employed.

Note: Tax laws change frequently, so always check with the Internal Revenue Service (IRS) or a tax professional for the most current information.

Payroll Tax Process

To begin the payroll tax process, you will first calculate the employee’s gross pay. Then, based on their gross pay, you will deduct a specified amount for federal income tax, based on the W-4 form the employee recently completed. You will also deduct a specified amount for FICA taxes.

Employers are required to deposit federal income tax and Social Security and Medicare taxes with the IRS monthly or semi-weekly. The schedule must be established before the start of the tax year. The FUTA tax deposit is due for the quarter in which the tax due exceeds $500.

The IRS provides assistance in calculating income tax to help determine the amount that should be withheld and reported as an employer.

FICA Tax Rates

The social security tax rate for employees is 6.2%. The social security tax rate for employers is also 6.2%, or 12.4% in total. The maximum social security tax is determined annually based on the maximum wage subject to social security, which is $147,000 for 2022 and $160,200 for 2023.

The Medicare tax rate for employees is 1.45%, and the Medicare tax rate for employers is also 1.45%, or 2.9% in total.

The Additional Medicare Tax of 0.09% is withheld on income exceeding $200,000 per individual. There is no matching by employers for this tax.

State Payroll Taxes

State payroll taxes vary from state to state. Most states, but not all, collect a tax on income. Some states do not impose taxes on wages but impose taxes on other forms of income, such as profits from investments. Additionally, some states withhold additional payroll taxes for:

  • State unemployment funds
  • State disability funds
  • State workers’ compensation funds

State payroll taxes apply to your business depending on where your employees work.

Note: Check with your state’s tax agency for details on what types of income are taxable and how to collect and pay payroll taxes.

How to Pay Payroll Taxes

Once you have calculated the amounts owed for federal income tax and FICA taxes and deducted these amounts from employees’ wages, you should:

  • Calculate
    The amount you, as a company, must pay for FICA taxes and allocate these amounts
  • Make payments to the Internal Revenue Service (IRS) monthly or semi-weekly, based on the total size of your employee payroll
  • Submit payroll tax reports quarterly using Form 941 or electronically filing

Reports and filings are due on specific dates, and if you fail to pay payroll taxes or send them late, your company may face financial penalties. These penalties start at 2% of the amount due for payments that are late up to five days. The penalty increases, up to 15%, if the company has exceeded 10 days of non-payment and the IRS has sent a payment notice.

Frequently Asked Questions

What are payroll taxes?

Generally, you will withhold 15.3% of the employee’s wages in each pay period for FICA taxes, plus an additional 0.9% Medicare tax if their income exceeds $200,000. You may also need to withhold federal income tax and state and local income taxes, as well as federal and state unemployment taxes. These amounts vary from employee to employee.

How do I pay payroll taxes for my employees?

Once you have withheld the taxes, you will need to deposit them with the IRS. You must make these deposits electronically by the deadline. If you are late, you could owe penalties of up to 15%. You will also need to file the appropriate form with the IRS.

Sources:
IRS. “Topic No. 751 Social Security and Medicare Withholding Rates.”
IRS. “Topic No. 560 Additional Medicare Tax.”
IRS. “Understanding Employment Taxes.”
IRS. “Depositing and Reporting Employment Taxes.”
Social Security Administration. “Contribution And Benefit Base.”
Squareup. “Payroll Taxes in 2020: Federal & State Tax Information.”
IRS. “Topic No. 757 Forms 941 and 944 – Deposit Requirements.”
IRS. “Employment Tax Due Dates.”
IRS. “Failure To Deposit Penalty.”

Source: https://www.thebalancemoney.com/payroll-taxes-the-basics-for-employers-398394

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