Employers have many payroll and employment withholding tax and payment responsibilities. One of the obligations small business owners have is to stay current with the numerous commitments for collecting and depositing federal, state, and local taxes. While many small business owners hire a tax professional or accountant to manage their tax-related matters, learning the tax system is essential to those who handle the ultimate responsibility for satisfying all tax obligations.
Employment and Payroll Taxes
All employers must report and deposit employment taxes. The law requires that employers withhold payroll taxes from their employees’ paychecks. Payroll taxes are the state and federal taxes you are required to withhold from your employees’ wages and pay on their behalf. You are also obligated to fund an equivalent amount of your employees’ Social Security and Medicare taxes and pay state and federal unemployment taxes. Employers must deposit these withholdings to various tax agencies.
- Federal Income Tax: Federal income taxes must be withheld from your employees’ wages and deposited into an account with the IRS. The amounts vary based on the amount you withhold and your type of business. To determine how much to withhold, use the employees’ Form W-4 and withholding tables from the IRS.
- Social Security and Medicare Taxes (FICA): As an employer, you are obligated to withhold a portion of Social Security and Medicare taxes from employees’ wages and deposit a matching amount of the wages withheld.
- Additional Medicare Tax: You also are required to withhold the 0.9 percent for additional Medicare tax on an employee’s compensation and wages when they exceed a specified threshold. However, there is no employer match for this tax.
- Federal Unemployment Tax (FUTA): You must list and pay FUTA tax independently from federal income tax, Social Security, and Medicare taxes. You pay FUTA from your funds; employees do not pay this tax or have it withheld from their pay.
- Self-Employment Tax: Self-employment tax is a Social Security and Medicare tax typically for people who work for themselves. It is comparable to the Social Security and Medicare taxes withheld from the wages of employees.
- State Income Tax: Most states use tax tables you can obtain by contacting the Small Business Administration or searching your state’s tax website. Withholding state taxes in jurisdictions that do not require state income taxes is not required. Other exemptions include states with personal income taxes as a fixed percentage of the federal tax, or state taxes that are a fixed percentage of gross wages.
- Various Local Tax Withholdings: There may be several different local taxes you are expected to withhold, such as school district, county, or city taxes, and unemployment insurance or state disability.
- Voluntary Payroll Deductions: Some employers offer employees voluntary payroll deductions for multiple benefits that the employee can select, such as life and health insurance premiums, employee stock purchase plans, union dues, retirement plan contributions, or other job-related expenses.
As an employer, you are obligated to deposit the employer and employee Social Security and Medicare taxes and federal income tax withheld. You can do this monthly or semi-weekly, but you must determine which deposit schedule you need to use before the start of each calendar year.
You can calculate employment and payroll taxes by determining taxable workers, determining taxable wages, and estimated withholding amounts. Each new employee is required to complete IRS Form W-4. This form enables you to calculate the federal income tax withholding amount from the employee’s earnings. Most states have income tax formulas similar to the federal system, so you will also use the Form W-4 to figure the state income tax withholding amount.Additionally, at the end of the year, you are required to complete and file IRS Form W-2 (Wage and Tax Statement) that includes the wages, tips, and other compensation you paid to your employees.
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.