The organizational form of your company in the USA and the choice of the form of taxation will determine the taxes you pay. Yet, there are basic payroll tax responsibilities that every employer should know about, and this is what we will talk about in this article.
How to Calculate and Report Deductions
To be able to calculate and subsequently report payroll taxes, the employer has to have each employee fill special federal forms. The income and withholdings declared in these forms will serve as a basis for calculating each employee’s taxes. If you decide to do it on your own, you can reference the IRS Publication 15, Circular E.
You can turn to professional payroll services or use accounting software to simplify this process and then deduct these expenses from your business taxes. An employer does not get to keep money deducted and has to keep a record of these payroll deductions to report and pay them to the tax department each year.
Statutory Payroll Tax Deductions
If you have employees, then you, as an employer, have a certain responsibility for withholding taxes from the salaries of persons working for wages. You must pay these taxes and submit certain reporting forms. A portion of these withholdings will be credited to the Social Security and Medicare trust funds, while federal income taxes will be deposited into the US Treasury general fund.
State, county, and city income tax withholdings are treated similar way as the Federal income tax, and only they are paid to the state, county, and city rather than the federal treasury. Unemployment insurance, state disability (if applicable), and other local tax withholdings are also part of the statutory payroll tax deductions.
Voluntary Payroll Deductions
You might be surprised, but not all payroll deductions are obligatory. Employees can choose to have the employer take a portion of their wage to pay for benefits, such as:
- Employee stock purchase plans
- Savings Plans (401K)
- Union Dues
Employer Payroll Tax Responsibilities
As an employer, you are obligated to not only issue a paycheck to your employees but also have certain payroll tax obligations.
- Collecting information related to taxes from employees when hiring and as necessary to accurately calculate payroll taxes;
- Withholding tax from employee’s wages each pay period;
- Depositing withheld money using the EFTPS or facing penalties. The amounts withheld are liabilities until they are paid;
- Paying the employer’s portion of payroll taxes;
- Keeping a financial record of employee work hours and wage, tax expenses and setting aside funds to pay the taxes;
- Filing payroll tax returns on time;
- Providing each employee with an annual payment summary.
Employer Payroll Taxes
As you have seen from the employer responsibilities section, the employer deducts not only payroll taxes from employees’ paycheck but also pay their share of payroll taxes. Employers are responsible for paying the following taxes:
- FICA – OASDI/Medicare;
- FUTA – used to pay administration costs of the unemployment program, not the benefits;
- SUTA (SUI) – used to pay the unemployment benefits;
- Workers’ compensation insurance – insurances employees against losses due to accidental injury or death while on the job;
- Any local taxes.
What is FICA? It is the Federal Insurance Contributions Act, which began during the depression. It was part of Roosevelt’s New Deal and was intended to provide income for retirement, injury-induced disability, or congenital disability. Thus, it is comprised of Social Security and Medicare taxes.
FICA is called a payroll tax because it is taken out of the employees’ paycheck every pay cycle, although employers add an equal amount to what the employees pay. The rate is 6.2% of gross pay up to a cap salary. Some states give employers to credit up to 5.4% towards their FUTA tax rate, given that they pay their SUTA taxes on time.
FICA withholdings also include 1.45% for Medicare benefits (employee share, also matched by an employer for 2.9% total Medicare withholding). Unlike Social Security, there is no annual wage-based limit for Medicare tax. If you are self-employed, you will pay both the employer and the employee shares of FICA. Also, even if you do not pay any income taxes, you will still pay FICA taxes.
Reporting Payroll Taxes
Employers are required to submit reports to the federal government as well as state authorities. These include different tax returns and wage and tax statements. If they fail to file tax reports on time, penalties and fines are sure to follow.
However, many do not realize that before doing payroll taxes and reports and even before hiring their first employee, each employer needs to register with various agencies to get their respective identification numbers required for filing taxes.