Payroll Taxes

Taxes are apart of life that we really can't get away from. Payroll tax, however, is a little more involved than the individual tax filing we do every year. Payroll tax includes several different tax laws and forms. Filing quarterly and annually, deducting from employee paychecks, and keeping all the tax laws straight can be a demanding job. Let's take a closer look at what is included in payroll tax, which includes the following:

1. Federal Income Tax
2. Social Security Tax
3. Medicare Tax
4. State and local Income Tax
5. Unemployment

Federal Income Tax

Federal Income Tax is something everyone should be familiar with as it is usually the biggest chunk taken out of an employee paycheck every pay period. Federal income tax can range from 10% for a person filing as Single and Head of Household making less than $10,300 per year to 35% for a married individual filing jointly who makes more than $380,700 per year. The following table is an example of how to determine what percentage of your paycheck should be taken out for Federal Income Tax:

Single Individuals filing as Head of Household
Income You Pay + % of Amount >
<$2,650 $0 0% $0.00
<$10,400 $0 10% $2,650
<$35,400 $775 15% $10,400
<$84,300 $4,525 25% $35,400
<$173,600 $16,750 28% $84,300
<$375,000 $41,754 33% $173,600
>$375,000 $108,216 35% $375,000

To read this table, the second line for example would be if your yearly income is less than $10,300 you pay $0.00 in Federal Income tax, plus 10% of any amount you make over $2,650. The third line would read if your yearly income is less than $35,400 you would pay $775.00 in Federal Income Tax plus 15% of any amount you make over $10,400. So if you made $25,000 per year, your Federal Income tax for one year would be $775 + 10% of $14,600 ($25,000-$10,400) which is a total of $2,235 in Federal Income Tax. The IRS website has several such tables to help employers determine what the federal withholding should be for each of their employees based on their employee's W-4's. A federal withholdings calculator is also available if employees would like to know their projected withholdings for the year.

Social Security and Medicare Taxes

The Federal Insurance Contribution Act (FICA) was enacted to provide health, pension, and disability benefits to those who qualify under the terms of the act. Social Security Tax and Medicare Tax are collected under the authority of FICA every payday. Social Security, or Old Age, Survivors, and Disability Insurance (OASDI) is paid by the employee then matched dollar for dollar by the employer. Social Security is 6.2% of the employee's first $106,800. Medicare is 1.45% of all employee wages. No credits or withholdings are permitted for the calculation of FICA taxes. If an employee has more than one employer, each of the employers has to deduct the FICA taxes up to the taxable wage base of $106,800. Altogether these two taxes equal 7.65% of gross earnings and must be matched by the employer.

State and/or Local Income Tax

The last tax that should be deducted from employee paychecks is the State and/or local Income Tax. The rates for this tax vary from state to state and from local to local. Check with your local tax authorities to determine withholding rates.

Unemployment

The Federal Unemployment Tax (FUTA) is separate from federal income taxes and is the responsibility of the employer. It is not deducted from employee paychecks. The FUTA tax rate is 6.2% of the first $7000 you pay to each of your employees, but you can take a credit against your federal tax by the amounts you pay to the state unemployment tax. The credit cannot be more than 5.4% of taxable wages. So if you were to take the maximum credit through paying state unemployment tax, your federal unemployment would be 1.8% of the first $7000 paid to each of your employees. The State Unemployment Tax varies from state to state as to the rate and taxable wage base. Check with your local tax authorities.

Now that all the specific payroll taxes have been covered, there are a few more things to know about payroll tax that can help streamline the system, namely:

1. Depositing Employment Tax
2. Reporting Employment Tax
3. Preparing and Filing Form W-2
4. Correcting/Adjusting Employment Tax
5. Outsourcing Payroll Tax Duties

Depositing Employment Tax

So you've collected all the federal and state taxes required throughout the quarter, and now it is time to send them to the IRS. There are four options to deposit income tax withheld, the employee and employer FICA taxes, and FUTA tax, and three of those options are electronic deposit, mailing, or delivering it to a financial institution that is an authorized depository for federal taxes. All deposits must be accompanied by form 8109-B and Income tax and FICA taxes must be deposited separately. The fourth option is through the Electronic Federal Tax Payment System on the IRS's website. Some businesses are required by law to choose this fourth option. Those businesses are the ones whose total depository of withholdings for the previous tax year were $200,000 or more or if they have ever been required to use the Electronic Federal Tax Payment System before.

When you deposit your tax liabilities is determined before the start of the tax year. You have two options, monthly and semi-weekly, both of which have requirements to be met to determine which schedule your business must maintain. The deposit schedule that you use is determined by what you reported on Form 941 during the year two years previous to the coming tax year. This is called the "look-back year" and starts July 1st and ends June 30th. If your look-back year's total deposit was $50,000 or less, you are a monthly depositor. If it was $50,000 or more, you are a semi-weekly depositor. If you are a new employer, your look-back year's total is considered $0, so you are a monthly depositor. The deposit schedule is not determined by the pay period which your business maintains. If you are a monthly depositor, you must deposit all tax liabilities by the 15th of the following month. If you are a semi-weekly depositor, your tax liabilities must be deposited by the following Wednesday if your payday was on a Wednesday, Thursday, or Friday, and on the following Friday if your payday was on a Saturday, Sunday, Monday, or Tuesday. If you accumulate $100,000 or more of taxes on a day during one deposit period, you must deposit the tax by the next banking day, whether you are a monthly or semi-weekly depositor.

If you do not deposit your tax liabilities on time for any reason, you will be penalized. The penalty is determined by the size of the deposit and the number of days late it is. In addition to the penalty, interest accrues from the due date until it is paid.

Reporting Employment Tax

Each quarter, employers who pay wages that require tax withholdings must file Form 941, unless you are an employer who meets the requirements for Form 944, which is an annual filing. The 941 form must me filed by the last of the month following the end of the quarter. Employers who file Form 944 have until the last day of the month following the end of the year to file. You can e-file your report or you can file through a reporting agent, who will e-file it for you. There are penalties for not filing on time. The maximum penalty is 25% of the unpaid taxes. In addition to penalties, interest accrues from the due date on any unpaid tax. Bottom line is pay on time and report on time.

Preparing and Filing Form W-2

At the end of the year employers must complete Form W-2 Wage and Tax statement for each of their employees to report wages, tips, and other compensation, i.e. bonuses. A copy of the W-2 must be given to the employee by January 31st following the tax year. Employers also have to send a copy of the form to the Social Security Administration.

Correcting/Adjusting Employment Tax

Occasionally you'll make a mistake on paying, reporting and filing your taxes and have to correct it. There are forms on the IRS website that allow for overpayment corrections and underpayment corrections, just be sure you are using the correct form depending on your filing requirements.

Outsourcing Payroll Tax Duties

Many employers outsource their payroll and tax liabilities to a third party payroll service. Payroll services can help assure that your taxes are paid on time and streamline the process, but remember, the employer is ultimately responsible for the payment of income tax withheld and both the employer and employee portions of the FICA taxes. There are reporting agents available to assist employers and third party services in making sure taxes are paid, filed, and reported correctly.