Payroll Taxes: A Beginner’s Guide For Employers
If you’re hiring employees for the first time, there’s a lot to worry about, from onboarding and compliance to payroll – which can be one of the most complex tasks. In particular, calculating and filing payroll taxes often trip up even the most experienced business owners. But getting payroll taxes right is essential or you risk financial penalties – and even criminal consequences.
At Complete Payroll Solutions, we’ve been providing outsourced payroll to clients for over 18 years. One of our core offerings with any of our payroll packages is payroll tax filing. To help you understand your responsibilities when it comes to withholding taxes from your employees’ pay and remitting them to the IRS and state agencies, here we’ll cover:
- What are payroll taxes
- How are payroll taxes calculated
- What are your responsibilities for filing payroll taxes
- What are the penalties for late tax filings
After reading this article, you’ll know the steps you need to take to properly manage payroll taxes for your workforce – and ensure compliance.
What are payroll taxes?
Payroll taxes are taxes imposed on employers and employees, typically calculated as a percentage of the wages employers pay their staff.
There are several components to payroll taxes. For employees, these include:
- Social Security*: This tax is used to pay the cost of benefits for elderly recipients, survivors of recipients and disabled individuals.
- Medicare*: The Medicare tax funds a portion of the Medicare insurance program.
- Federal income tax: The federal government will withhold a certain percentage of what employees earn in a year.
- State income tax: In all but 9 states, states will also withhold income taxes.
- Additional state and local tax: In some areas, there are additional withholdings, for example, Temporary Disability Insurance (TDI) in Rhode Island and local income taxes in New York City
These taxes are first deducted from an employee’s pay, then must be sent to the US Treasury and appropriate state agencies in what’s known as a federal tax deposit, which we’ll discuss in a bit.
An employer also has some payroll tax obligations. Specifically, you must match the Social Security and Medicare taxes and also pay into the federal and state unemployment fund, if applicable. Like employees, you may also have other state and local tax burdens depending on your jurisdiction.
* Social Security and Medicare combined are known as FICA taxes.
How are payroll taxes calculated?
Some of the payroll taxes are fixed percentages based on an employee’s wages while others depend on tax rates imposed by the federal and state governments.
Social Security and Medicare taxes are fixed percentages for both employees and employers:
- Social Security: The current tax rate for Social Security is 6.2% for the employee (and likewise the employer), or 12.4% total. The Social Security tax has a wage base limit, meaning there’s a maximum wage that is subject to the tax. For 2021, that base is $142,800.
- Medicare: The Medicare tax rate is 1.45% for the employee and employer, or 2.9% total. There may also be an additional Medicare tax of.9% if an employee’s wages exceed $200,000 in a calendar year.
In addition, your federal unemployment tax (FUTA) as an employer is also fixed. The current rate is 6.0% and it applies to the first $7,000 in wages you pay each employee. However, you can qualify for a tax credit of up to 5.4% based on your timely payment of state unemployment taxes so your rate can be as low as .6%.
Income taxes, on the other hand, depend on the amount an employee earns as well as the information they supplied when they filled out their Form W-4. When completing this form, the employee indicates their filing status, number of dependents, other income and anticipated credits and deductions. You’ll then use this information to withhold the appropriate taxes.
Similarly for state income taxes, 32 states currently require employees to complete a separate state W-4.
As their situation changes, for example, they have a child, employees should update and provide a new federal or state W-4 to make sure they are not under or overpaying their taxes.
What are your filing responsibilities?
Once you’ve established the appropriate amount to withhold from an employee’s pay for taxes, you’ll need to take 3 steps:
- Calculate and withhold the payroll taxes from your employee’s paycheck.
- Make timely deposits.
- Federal payroll taxes: Deposit all federal payroll taxes using electronic funds transfer according to a set deposit schedule. There are generally two deposit schedules: monthly and semi-weekly. Before the beginning of each calendar year, you’ll need to determine which of the two deposit schedules you are required to use based on your lookback period. If you make a late deposit, you could face a penalty of up to 15%.
- State -level payroll tax schedules: Check your local taxing authority such as the department of revenue for details. For example, in Rhode Island, an employer who withholds $24,000 or more for any calendar month in the year from employees’ wages must remit the taxes withheld on a daily basis.
- FUTA and SUTA: FUTA taxes must be deposited the last day of the first month that follows the end of the quarter if you paid a minimum of $1,500 in wages in the previous calendar year or quarter. Again, each state has its own deposit schedule for state unemployment taxes (SUTA) so check with your local unemployment office.
- Report on the deposits. You’ll report quarterly about FICA and income tax withholdings using Form 941 (with an annual report on Form 944 for a small employer). You also must report the withholdings annually to employees on Form W-2 and the Social Security Administration on Form W-3 about employee’s tax payments. For unemployment insurance taxes, you have to file an annual FUTA report on Form 940 as well as file state-level reporting, if applicable.
What are the penalties for late tax filings?
If you don’t collect, remit and report federal payroll taxes, the IRS can assess penalties and interest. For example, for failure to file Form 941, you risk a 2% penalty if you’re up to 5 days late. And that amount increases the longer the taxes go unremitted, with a maximum penalty of 15%.
Ultimately, you’re responsible for the deposits and can even be personally liable. In fact, the IRS can target business owners, check signers and others who had a role or could have had a role in the failure to pay. And the consequences can be steep, including prison time.
How to Get Payroll Taxes Right
As you can see, there’s a lot involved in properly managing payroll taxes. And since the penalties for non-compliance can be severe, you may want to outsource payroll to a third-party provider who will calculate and pay all payroll taxes on your behalf. They will also respond to any potential notices you may receive and take responsibility for any penalties and/or interest if the late filings aren’t your fault.
If you’re considering a payroll provider, Complete Payroll Solutions is a great fit for companies who:
- Have between 1 and 1,000+ employees
- Want an experienced team with over 18 years of history processing payroll and payroll taxes
- Prefer a team of local payroll specialists with a dedicated professional to answer any questions you may have
If this sounds like you, read our next article on our payroll packages to learn which option may be right for your business. Want to know more about your responsibilities when it comes to payroll before you decide? Read our beginner’s guide to payroll.