When it comes to paying taxes business owners are responsible for collecting, paying, and reporting federal and state payroll taxes on time and accurately. Payroll taxes, also known as withholding taxes, are taxes withheld from each employee’s paychecks and paid into the various government systems which they fund. Many small business owners are unaware of these tax requirements when they start up a business.
When it comes to payroll taxes there are a variety of taxes you have to pay when running payroll. From Social Security to federal income taxes these costs can add up. It’s important to know what taxes need to be paid and why you have to pay them. When it comes to paying taxes business owners are responsible for collecting, paying, and reporting federal and state payroll taxes on time and accurately. Payroll taxes, also known as withholding taxes, are taxes withheld from each employee’s paychecks and paid into the various government systems which they fund. Many small business owners are unaware of these tax requirements when they start up a business. These taxes include Social Security and Medicare taxes, along with FICA Federal Insurance Contributions Act (FICA) taxes as well as federal, state, and local income taxes.
I’ll be breaking down the various taxes that are to be included in payroll tax filings and help you to have a better understanding of what they are and why you need to pay them.
What You Need to Know About Payroll Taxes
Payroll taxes are more than just income tax withholdings it also includes Medicare, Social Security, and Unemployment taxes. Payroll taxes need to be withheld from employee paychecks and it’s the responsibility of employers to ensure that those taxes are being withheld. The IRS (Internal Revenue Service) and state revenue departments are the governing agencies tasked with ensuring that these taxes are paid accurately and on time.
Rates can change annually depending on laws that are put into place by federal and state legislatures which means you want to use accurate information each year to ensure you are staying compliant with tax rates and codes.
Payroll tax calculations include both Social Security and Medicare taxes. These tax filings fall under the FICA filing. The current total rate is 12.4% for Social Security and 2.9% for Medicare. And, the employer is responsible for half that amount and the employee is responsible for the other half. Thus the rate is divided as 6.2% for Social Security taxes and 1.45% for Medicare taxes for each of the contributions.
It is important to note that there may be a different rate for employees who earn an excess of $200,000 annually.
FICA taxes are calculated as a percentage of an employee’s income. Employees and employers both pay the same amount which can be calculated using a simple calculation. Multiply the employee’s taxable income rate by 7.65% (the combined SS and Medicare rates). This is the rate owed by the employee, and the employer then matches that rate.
This tax requires employers to pay into the Federal Unemployment Tax Act (FUTA) which aids employees who lose their jobs as they seek to find a new place of employment.
Each employer who is paying a minimum of $1500 or more in any calendar quarter and had one or more employees in any of at least 20 weeks per annual year. This includes all employees from full-time and part-time to temporary workers.
The tax rate for the Unemployment tax is 6% paid on the first $7000 of the employee’s wages. Additional wages are exempt from the unemployment tax.
There may also be State Unemployment Taxes (SUTA) which you may be responsible to pay. So be sure to check your state tax rates for specific requirements.
Income taxes are taxes that the employee is required to pay. This includes federal income tax, state income tax, and any local income tax. So you will need to be aware of the various tax requirements for your state and location. Most employers pay this tax into the income tax funds on behalf of their employees. Employees then are required to file personal tax returns annually to determine if they paid the correct amount into the income tax funds. If the employers filed correctly, the employee may not owe additional funds.
Some may get a tax refund, depending on the deductions, and tax credits that they file. If however, the employer doesn’t deduct enough to cover the amount of tax owed, the employee is responsible for paying additional taxes into the income tax funds.
Employers will collect a W-4 form from each employee which they hire to appropriately file the
Payroll Taxes Forms
When it comes to calculating payroll taxes it’s important to know which forms are necessary. There are forms needed to be completed by employees when they are hired. And, there are forms that employers file quarterly to pay into the various tax funds. Then, before the tax return season begins employers must file forms that are sent to employees to use to file their personal income tax returns.
Tax Form W-4
Form W-4 is an important form which you will need each employee to fill out as they go through the onboarding process to begin working for your business. The employees enter important information on the form including identification, marital status, and the number of dependents. Having this information is important because it allows you a way to file their payroll taxes correctly and calculate how much to withhold from their paychecks.
You should also set up a system to have employees review their W-4 form annually to determine if any changes need to be made. These changes occur when life events happen such as weddings, births, and perhaps deaths.
The information found on each of the employee’s W-4 forms will be what you use to produce the annual Form W-2 report for each tax return season.
Tax Form W-2
Each January, every employer in the nation is responsible for distributing a Form W-2 to employees. This form is used by the employees to file their personal income tax returns. The form is to be sent or given to the employee by January 31st every year.
As employees file their returns they’ll discover how much was withheld from their paychecks to pay into their taxes. When employers withhold too much the filer will generally get a tax refund. When employers don’t withhold enough the employee will end up owing taxes. This is why it’s important for the employee to properly fill out Form W-4. If they find that too much, or too little was withheld they can adjust their W-4 form.
Tax Forms 940 & 941
In addition to the above forms, W-4 and W-2 employers are required to use Form 940. This form is what you use to report your annual FUTA tax contributions.
When you pay your State Unemployment taxes (SUTA) by each quarterly deadline, you can qualify for a federal FUTA tax credit. This credit means you can receive back up to 5.4% of the amount you have paid to the Federal Unemployment Tax. This means that your total FUTA contribution could be reduced down to less than 1 percent.
To file your annual income tax reports you’ll need to use Form 941 which shows the amount of income taxes, social security tax, and Medicare tax which was withheld from each employee’s paycheck.
When it comes to calculation, filing, and reporting payroll taxes it’s easy to understand why small business owners wind the process to be overwhelming. The IRS offers two methods for the process. You can self-file, or utilize the services of a tax professional for filings.
At Cowdery Tax and Business Solutions, we offer you a simple, reliable way to manage your quarterly and annual payroll tax bookkeeping. To learn more, contact us by entering your questions in the contact form below.