Payroll taxes are an essential part of running a business and having employees. It’s essential for organizations to understand what payroll taxes are and what their responsibilities are. Today, we’ll explain the basics of payroll taxes and what employers are required to do.
The employer withholds a percentage of the employee’s pay on the government’s behalf. This is known as the payroll tax. The value of the payroll tax depends on the tips, salaries and wages paid to the employee. payroll taxes are paid directly to the IRS (Internal Revenue Service).
Here’s the basic process:
- An employer calculates the gross pay for the employee.
- The employer deducts federal income tax and the amount for FICA.
- The employer must deposit the payroll taxes before the beginning of the tax year
Federal payroll taxes go toward Social Security and Medicare programs. On pay stubs, these are noted as “FICA” and “MedFICA.” Federal income tax is also withheld from the paycheck, and this tax funds the U.S. Treasury.
Calculating Payroll Taxes
Since employers must take out the payroll tax, it’s imperative that they know how much to take. Here’s what employers should know about calculating payroll taxes:
- 6.2% is deducted for the Social Security tax.
- 1.45% is deducted for the regular Medicare tax.
- Any employee who earns over $200,000 must pay a .9% surtax for Medicare.
All of the above are what employers must withhold from employee’s paychecks. However, companies must also pay an employer’s portion of the taxes. Here are the employer’s portions:
- 6.2% Social Security tax
- 1.45% Medicare tax
Payroll Tax for Tipped Employees
Employers with tipped employees have different payroll requirements. Tips are payments that customers make voluntarily, and the customer can determine the amount of their tip. As the employer, you must withhold income taxes and FICA for reported tips. Even though you cannot control the amount of tips the employees receive, you must pay the employer’s portion for these tips as well. Employees can use Form 4070 to report their tips. However, if employees fail to report tips of $20+ per calendar quarter, then you are only liable for the employer’s portion of FICA.
Report Payroll Taxes
Employers must report payroll tax obligations and deposit payroll taxes on time. By visiting the American Payroll Association website, you can find links to state and tax agencies for filing reports. Additionally, employers must adhere to the following reporting requirements:
- Annual Return of Withheld Federal Income Tax Form 945
- Federal tax deposits
- Wage and Tax Statements (W-2 Forms)
- Employer’s Quarterly Federal Tax Return (Form 941)
- Annual Return of Withheld Federal Income Tax (Form 945)
Payroll Taxes: Understanding the Nuances
Understandably, payroll taxes can be a bit confusing for employers, but mistakes can be costly. Audits may lead to expensive fines and legal complications, so it is crucial for organizations to correctly handle their payroll taxes. Additionally, tax laws can change, and keeping up with the current tax information can be a struggle.
Many employers benefit from working with a professional to manage their finances and tax obligations. Working with a tax professional ensures accurate payroll taxes and prevents mistakes.