Intro
Hiring employees for the first time brings numerous challenges, from onboarding and compliance to managing payroll — a particularly intricate task. Calculating and filing payroll taxes company can perplex even seasoned business owners. Accurate payroll tax management is crucial, as errors can lead to severe financial penalties and even criminal consequences.
By the end of this article, you will know the necessary steps to effectively manage payroll taxes for your workforce and ensure compliance.
What Are Employer Payroll Taxes?
Payroll taxes are levies that employers withhold from employees’ paychecks and remit directly to the government. These taxes help fund various social insurance programs, including Social Security and Medicare. While both employees and employers contribute to payroll taxes, it is the employer’s responsibility to deduct and forward these taxes to the government.
Types of Employer Payroll Taxes
In the United States, employers are responsible for various payroll taxes and deductions. Here’s an overview of the payroll tax explained you should be aware of:
Federal Income Tax
Federal income tax is imposed on wages and profits and is paid to the U.S. government. According to the IRS, this tax applies to both earned income (salaries, wages, tips, commissions) and unearned income (interest, dividends). It can be levied on individuals and businesses alike.
The U.S. utilizes a progressive federal income tax system, meaning the tax rate increases with higher income levels. For example, an employee earning below $44,725 yearly pays a 12% tax rate, while someone earning above $578,126 annually is taxed at 37%. Employees who earn less than $11,000 pay no federal income tax. While not technically a payroll tax, federal income tax withholding is an essential part of payroll processing.
Social Security and Medicare Taxes (FICA)
Employers must contribute to Social Security and Medicare taxes for their employees, collectively known as FICA taxes (Federal Insurance Contribution Act). FICA tax rates range from 10-37%, divided equally between employers and employees.
- Social security: This tax supports the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI), providing benefits for retirees, survivors, and disabled individuals.
- Medicare: Contributions go to the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund, aiding in covering medical expenses.
Federal Unemployment Tax (FUTA)
Federal Unemployment Tax Act (FUTA) is an employer-paid tax that funds compensation for jobless workers. Unlike other taxes, FUTA is not deducted from employees’ paychecks but is instead paid directly by employers.
Retirement Programs
Employers can also offer retirement programs, deducting a portion of employees' salaries to create pension funds accessible upon retirement. The rates of these deductions vary among companies and individuals.
State Income Tax
State income tax regulations, rates, and brackets differ widely among states. Some states have a flat rate, while others use a progressive system. A few states, such as Florida and Texas, do not impose a state income tax. Employers must withhold the appropriate state income tax from employees’ paychecks and remit it to the state tax authority.
State Unemployment Tax (SUTA)
Also known as State Unemployment Insurance (SUI) or reemployment tax, SUTA funds unemployment benefits for displaced workers. In most states, only employers contribute to SUTA. Rates and taxable wage bases vary by state. For instance, in Florida, the rate applies to the first $7,000 of each employee’s annual wages.
Local Taxes
Employers should also check for local payroll taxes required by cities or municipalities. Both employers and employees may contribute to these taxes, which fund local services and infrastructure. For example, Philadelphia imposes a Wage Tax on both residents and non-residents working in the city. Employers must withhold this tax from wages and remit it to the city. Rates and usage of these taxes vary by location, often supporting city services like public safety and park maintenance.
What is a difference between payroll and income taxes?
Though both payroll taxes and employee income tax relate to employment, they are distinct in nature.
- Payroll taxes: These are shared by both employers and employees and are calculated as a percentage of the employee’s salary, with the employer matching the amount. They primarily consist of Social Security and Medicare taxes.
- Employee income tax: This progressive tax is solely the responsibility of the employee. The tax rate increases as the individual's taxable income rises. Based on the employee’s W-4 form, employers withhold this tax from the employee’s paycheck and remit it to the government.
How Do I Calculate Employer Payroll Taxes?
Calculating payroll for beginners involves summing up all the individual taxes that constitute taxes. Follow these steps:
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Establish gross earnings: Determine the employee's total income before any deductions, including regular hourly or salary wages, overtime, bonuses, commissions, and tips.
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Calculate Social Security tax: Multiply the gross earnings by the employer’s portion of the Social Security tax rate, which is 6.2%.
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Calculate Medicare tax: Multiply the employee’s gross wages by the employer’s portion of the Medicare tax rate, 1.45%.
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Calculate Federal Unemployment Tax (FUTA): Multiply the first $7,000 of each employee’s annual wages by the FUTA tax rate of 6%. In some instances, you may qualify for a credit of up to 5.4%, which can reduce the FUTA tax rate to as low as 0.6%.
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Calculate State Unemployment Tax (SUTA): This calculation varies by state. Generally, you'll multiply a portion of the employee's wages by your state’s SUTA tax rate.
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Total employer payroll taxes: Add all the calculated taxes to determine the total amount of employer payroll taxes.
When Are Payroll Taxes Due?
Here are the due dates for filing various guide to payroll tax forms:
- Form 940: This form, used to report the annual Federal Unemployment Tax Act (FUTA) tax, is due by January 31 of the following year.
- Form 941:This form is used to report income taxes, Social Security tax and Medicare tax withheld from employee paychecks, along with the employer's share of Social Security and Medicare taxes. The due dates are:
- April 30 for the first quarter (January 1 to March 31)
- July 31 for the second quarter (April 1 to June 30)
- October 31 for the third quarter (July 1 to September 30)
- January 31 for the fourth quarter (October 1 to December 31)
- Form 944: For employers who owe $1,000 or less in payroll taxes for the year, this form is due on January 31 of the following year.
- Fill out Form W-3: This transmittal form is sent to the Social Security Administration (SSA) along with Copy A of all the Forms W-2 issued for the year. It reports total earnings, Social Security wages, Medicare wages, and withholdings for all employees. This form is due by January 31 of the following year.
What Are the Penalties for Not Paying Payroll Taxes?
Failure to meet payroll tax obligations can result in significant penalties imposed by the IRS:
- Failure to deposit: If payroll taxes are not deposited on time, penalties range from 2% to 15% of the unpaid tax, depending on the number of days late.
- Failure to file: Penalties for late filing of payroll tax forms typically range from 5% to 25% of the unpaid tax for each month or part of a month that the return is late.
- Trust fund recovery penalty: If you withhold payroll taxes from employees but fail to remit them to the tax authorities, you may incur a penalty equal to the full amount of the unpaid payroll taxes, effectively doubling the liability.
- Penalty for misclassification of employees: Misclassifying employees as independent contractors can result in penalties, including 1.5% of wages, 40% of the FICA taxes not withheld from the employee, along with 100% of the employer's share of FICA taxes that should have been paid.
How Can I File My Payroll Taxes Electronically?
The IRS offers two options for electronically filing payroll tax forms:
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Submit the forms yourself: You can file the forms directly through the IRS's e-file system.
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Use an authorized IRS e-file provider: You can locate a tax professional through the authorized IRS e-file provider locator service to submit the payroll tax forms on your behalf.
Conclusion
Understanding payroll taxes is a critical responsibility that requires meticulous attention to detail. From calculating each type of payroll tax to meeting the respective filing deadlines, the process can seem daunting, especially for new employers.
Remember to stay informed about federal, state, and local tax laws, and never hesitate to consult with tax professionals to ensure compliance and accuracy. By understanding your payroll tax obligations and adhering to best practices, you can make payroll processing more efficient and reduce the risk of unintended financial consequences.
