Payroll Taxes and Employer Responsibilities

Payroll Taxes and Employer Responsibilities

A responsibility of every profit-making enterprise is the payment of taxes. Businesses require federal, state, and local services, and taxes are the cost of those benefits. One of the ways these agencies determine your company’s tax obligations is your payroll. 

The business form of your company—sole proprietorship, partnership, S-Corp, C-Corp, or LLC—determines your tax liabilities. If your company has employees, however, you have basic payroll tax responsibilities that apply to every form of business. As an employer, you need to know the fundamentals of payroll taxes.

How to Calculate and Report Deductions

At its most fundamental level, your responsibility as an employer is to calculate, withhold and subsequently report payroll taxes. You start this process by requiring each employee to fill out federally mandated payroll tax forms. The minimum set of forms for an employee include:

• Form I-9: Employment Eligibility Verification
• Form W-4: Employee Withholding Certificate 

Form W-4 is critical to enable you to calculate the tax withholding amount for each pay period for your employees. Aside from providing you with the employee’s identification information, including the Social Security Number, Form W-4 tells you 

• the employee’s legal name
• the marital status of the employee
• the number of dependents in the employee’s household
• whether the employee has more than one job for which taxes are being withheld
• other optional deductions or additional withholding amounts the employee wants to include in his payroll taxes. 

These declarations form the basis for calculating each employee’s withholding amount. If your company has a bookkeeping or payroll service, they know how this process works. If you are doing your own payroll, you can learn the details of payroll taxes in the IRS Publication 15, Circular E. 

Most accounting software systems can streamline the payroll tax calculation process for you. An even simpler solution is to engage a professional payroll service. The costs of the software or the payroll service are a deductible business expense on your business taxes. 

Statutory Payroll Tax Deductions

As an employer, your legal responsibility is to collect the money withheld from the paychecks of each employee working for wages, deposit it with the federal and state tax agencies, and file a report of payroll withholding with the federal and state government. You withhold money to cover the employee’s liability for income tax, Social Security, and Medicare. 

State, county, and city income tax withholdings are treated similarly to the federal income tax. You may also be responsible for withholding and reporting money for unemployment insurance, state disability, and other local taxes. You must know the requirements for these additional statutory payroll tax deductions for the jurisdictions in which you do business.

Voluntary Payroll Deductions

In addition to the required statutory payroll tax deductions, employees may also request you to withhold money from their paychecks for voluntary benefits, such as:

• Employer pension plan
• Employee stock purchase plans
• Savings plans (401K)
• Union dues
• Medical and dental insurance plans

Employer Payroll Tax Responsibilities

Your obligations as an employer include both issuing a paycheck to your employees and processing payroll taxes, including the following: 

• Collect information from employees to accurately calculate payroll taxes when a new employee is hired and as their life situations change, such as marriage, divorce, a new baby, an adult child moves out, and so forth.
• Withhold taxes from employees’ wages each pay period.
• Deposit withheld money using the Electronic Federal Tax Payment System® (EFTPS®). The amounts withheld in each payroll cycle are recorded as liabilities in your accounting records until they are paid to the government. (Note that failing to pay payroll taxes will result in fines levied by the government.)
• Pay the employer’s portion of payroll taxes.
• Keep a financial record of employee work hours and wages, tax expenses, and the funds set aside to pay the taxes.
• File payroll tax returns on time.
• Provide each employee with an annual payment summary (IRS Form W-2).

Employer Payroll Taxes

Not only do employees pay taxes in the form of payroll withholding, you as the employer are also required to pay your share of payroll taxes. Out of company funds, not from withheld employee money, you must pay the following taxes at each payroll cycle:

In addition to federal taxes, other taxes are may be required depending on the state and municipal jurisdictions in which your company is located:

• SUTA (SUI) – The State Unemployment Tax Act collects money to fund the state unemployment benefits program.
• Workers’ compensation insurance – This program insures employees against losses due to accidental injury or death while on the job.
• Local taxes – The type of taxes and amounts due depend on the laws in the local jurisdictions where your company operates.

FICA Taxes

FICA came into existence during the Great Depression as part of Franklin D. Roosevelt’s “New Deal” program of legislation. FICA, or Social Security, provides income for retirement, injury-induced disability, or congenital disability.

FICA is called a payroll tax because it is taken out of the employees’ paycheck every pay cycle. Employee taxes cover only half the cost of the Social Security program. You as an employer add an equal amount to what the employees pay. In 2021, the rate of employee FICA tax is 6.2% of gross pay up to an annual salary cap of $142,800. Note that the federal government may offer you a FICA tax credit upwards of 5.4% if you pay your SUTA taxes on time. 

Withholding for Medicare is 1.45% from each employee, with the employer matching that amount for a total of 2.9%. Unlike Social Security, the Medicare tax has no annual wage-based limit. 

If you are self-employed, you get to pay both the employer and the employee shares of FICA. Also, even if you do not owe any income taxes, you still must pay FICA taxes.

Reporting Payroll Taxes

Your company is required to submit tax reports to the federal and state governments. These reports include tax returns and wage and tax statements. If you fail to file tax reports on time, penalties and fines are assessed. 

Before doing payroll taxes and reports, and even before hiring your first employee, you must register your business with various government agencies to get your identification numbers required for filing taxes. The required forms depend on the state and city in which you do business and the type of business you intend to operate. The laws differ for sole-proprietorships, partnerships, corporations, and LLCs. 

At a minimum, you must have a business license. If you incorporate, the registration process is more complicated. You need employer identification numbers (EINs) from both the federal and state governments. It is highly recommended that you seek the advice of a general business attorney or a tax attorney when you start a new business, so you get off on the right legal foot.

Have questions about Payroll Taxes? Contact us at learn.more@bookstime.com for a free consultation.