Individuals and companies who pay wages to employees are legally required to withhold certain amounts from their workers’ salaries to forward to federal, state and local authorities in satisfaction of their tax burdens throughout the year. In addition, businesses are also responsible for contributing to unemployment insurance programs to ease the burden of joblessness for their employees.
Proper Withholding Is of Utmost Importance
It cannot be overemphasized that you and not your employees are solely responsible for ensuring that taxes are automatically withheld from each paycheck. Additionally, you will be required to contribute to federal and state programs intended to assist the unemployed and underemployed. Here is an overview of the major payroll taxes for which you will be responsible.
Obligations Under FICA: Social Security and Medicare
The Federal Insurance Contributions Act (FICA) established a framework to provide for living and medical expenses. The Social Security tax supports individuals who have reached the federal age of retirement and their survivors. It also may be used to assist those who cannot work prior to retirement due to partial or complete disability. The Medicare tax funds a system of health coverage for aging citizens whose mounting health costs are difficult to meet on fixed incomes after leaving the workforce.
The two taxes have different rates. The Social Security tax has a dollar limit that is adjusted for inflation each year. There is a matching employer contribution required by law. There is no limit for the Medicare tax levied on employees. The Medicare tax is withheld from the employees’ wages in two tiers based on earnings. There is a mandated employer match on this tax, as well, but only for the first tier.
Obligations Under FUTA: Federal and State Unemployment Taxes
The Federal Unemployment Tax Act (FUTA) created an insurance system that works in conjunction with state-managed programs. Funds collected constitute the Federal Unemployment Trust Fund, which is administered by the Department of Labor (DOL). The money in the fund is used to provide temporary monetary and employment assistance to unemployed, underemployed or laid-off workers.
Federal Unemployment Insurance Trust Fund Payments
Payments into the trust fund are made by the employer only. There is no withholding from the employees’ pay. Employers are usually able to offset some of the cost of helping to ensure the wellbeing of unemployed workers through the FUTA Credit Reduction for employers in states that have accepted federal loans from the DOL to help meet their obligations under their unemployment insurance programs. The maximum amount of this credit is set by federal law. The credit may be claimed, if available, when an employer files Form 940.
State Unemployment Insurance Payments
Most employers will also be subject to state-level taxes to help support the delivery of assistance in the states in which their employees work. Just as with federal unemployment taxes, there is no amount withheld from the employees’ wages. Every state has a different rate, and not all states will satisfy the criteria to allow you to claim the FUTA Credit Reduction.
Consider Having an Expert Handle Your Payroll
If you have wage or salaried employees and your payroll isn’t the same from one pay period to the next, it’s probably a smart idea to retain the services of a good payroll service to handle the process for you. Payroll companies gather data on hours worked and calculate pay, including any overtime, holiday and other special compensation you have designated. They print paychecks, initiate direct deposits and provide detailed payroll reports. Because they specialize in ensuring tax and benefits withholdings and employer obligations are accurately processed, they can help protect you from the added financial and legal costs of compliance lapses. As your workforce grows in size and your compensation structures become more complex, a payroll company can save you aggravation, time and money.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.