If you’re new in the world of business and even so to the payroll system, here’s a quick guide to walk you through the basics of payroll taxes.
What is Payroll Tax?
As an employer, payroll taxes are the state and federal taxes required to be paid/withhold on behalf of your employees. It is a self-assessed, state and territory tax imposed on businesses in the U.S. The payroll tax rates and thresholds are subject to vary between states and territories. Employers are responsible for calculating the payroll taxes and sending the money to the respective government agencies. Some of the payroll taxes are paid by the employees, which are deducted from workers’ paychecks while other payroll taxes are paid by employers, not employees.
Do you, as an Employer, have to register for Payroll Tax?
Yes, if the total U.S. taxable wages paid by you or your business group exceed the monthly or annual threshold amount.
Thumb Rules of Payroll Taxes
It is one of the first and most important aspects for employees. As an employer, it is the first decision you have to make in order to pay your employees for certain days of work. Payday is typically a fixed number of days after the end of the pay period. Ideally, it is the health insurance premiums and retirement savings, which are deducted automatically from an employee’s paycheck. However, these deductions combined with payroll taxes together result in paychecks.
Nevertheless, for tax purposes, employers need to note that payday is considered to ensure the length of the period in which you need to pay, as well as file payroll taxes.
Calculating Payroll Taxes
Bear in mind the below three steps as the basis to calculate payroll taxes:
- Determine taxable workers
- Determine taxable wages
- Calculate withholding amounts
Paying up the withholding amount on time is crucial as remitting funds to the IRS on the deadline is not only an obligation but obvious.
Mandatory Payroll Tax Deductions
Some of the most common and statutory payroll tax deductions are as follows:
- Social Security tax withholding (6.2% up to the annual maximum)
- Medicare tax withholding (1.45%)
- Additional Medicare tax withholding
- Federal income tax withholding
- Federal Unemployment Tax
- State income tax withholding
- State Unemployment Tax
- Other local tax withholdings (such as school district taxes, city, county, state disability or unemployment insurance)
Paying Payroll Taxes
As taxes are to be paid based on wages, both employers and employees have to pay payroll taxes to the IRS (Federal Taxes) and various state tax agencies. In some cases, both these entities also have to pay to cities and municipalities.
However, generally, employers are responsible for collecting the Federal Income tax, Medicare tax, and Social Security from employees’ paychecks based on the employee’s information filled in his/her Form W-4.
In addition, employers must also pay and collect State Income tax and a suitable matching amount of Medicare tax, Social Security and Federal Unemployment Tax (FUTA – a federal employer tax along with state unemployment tax (if applicable)).
Besides FUTA, which is usually paid on a quarterly basis, other taxes such as Federal and State Income taxes are to be paid on a monthly basis by an employer. However, depending on the size of the business, certain employers receive frequent notifications on a monthly basis from the Federal and State government while full-service payroll providers withhold their taxes and cumulatively pay to the government when the taxes are due.
Filing Payroll Taxes
As an employer, you’ll need to file important forms such as Federal Form 941, commonly referred to as the quarterly federal tax return form, as well as the Form 940 (FUTA tax return yearly form) if you’re paying your employees. A similar procedure must adhere while filing forms to the state government too.
In addition, it is an employer’s responsibility to file and send forms such as W-3 and W-2 to the Social Security Administration (SSA) every year.
Business owners and employers have grave obligations with regard to payroll taxes. In most case scenarios, they rely on their Payroll Service Providers to calculate and pay the taxes accurately and promptly on their behalf.
Choose Crest Payroll Software & Say Goodbye to Manual Tax Calculations
As an employer, you must have a reliable payroll system in place for proper financial relief and ensure payroll taxes are being withheld accordingly. If you’re one of those business owners who find calculating tax, deductions, and contributions stressful or time-consuming, learn more about our crest payroll software. It is a payroll software that minimizes the time you spend on making salary payments, in turn, increasing the accuracy of your calculations. As a Payroll Service Provider, we process payroll for several clients (across one or multiple states).