All About Payroll Taxes

How to Calculate, Pay, Report Payroll Taxes

Payroll Taxes are those taxes you withhold from employees for income tax and FICA taxes (Social Security/Medicare) and pay as an employer. You must collect these taxes, pay the taxes to the IRS, report on taxes paid, and file payroll tax reports. You must also make payments for unemployment taxes and worker's compensation coverage

The payroll tax process begins with paying employees. When you pay employees, you must withhold payroll taxes and other employment taxes from their pay. For each payroll, you must keep track of the payroll taxes you deducted, as well as setting aside money to pay your portion of those taxes as an employer. 

As required by federal and state agencies, you must report the taxes owed.

Finally, you must make periodic payments of these taxes. 

This article tracks the process, with tips to help make it easier. 

What are Payroll Taxes?

The distinction between payroll taxes and employment taxes is confusing. Most people use the term "payroll taxes" to mean taxes associated with payroll. The IRS calls them employment taxes. 

Payroll taxes, in this article, include several taxes: 

  • Amounts withheld from employee pay for income taxes owed by the employees
  • Amounts withheld from employee pay for social security and Medicare, which are
  • Matched by amounts employers must contribute for social security and Medicare taxes (called FICA tax).
  • Additional taxes paid by employers (not employees) for unemployment taxes and worker's compensation. 

Payroll taxes are called "trust fund taxes," because they are held in trust for the owner (the IRS, Social Security Administration, and your state).

What is My Responsibility as an Employer for Payroll Taxes?

Employers are responsible for: 

  • Collecting information from appropriate payroll tax documents from employees at hire and other times,
  • Correctly calculating payroll taxes and other employment taxes,
  • Withholding them from employee pay,
  • Setting aside amounts you must pay as an employer, into separate accounts payable in your accounting system,
  • Paying payroll taxes to the IRS, states, and other taxing authorities
  • Filing payroll tax reports in a timely manner.

These articles will help you with the work of calculating, withholding, paying, and filing payroll taxes.

Before Hiring Your First Employee - Federal Registrations

All About Payroll Taxes - for Employers
All About Payroll Taxes - For Employers. Patrick George/Getty Images

Before you hire your first employee, there are some tasks you must undertake and some registrations you will need to have.

You will need an Employer ID number, which means registering with the IRS. It's easy to apply online and receive the number immediately. 

You must also register with the IRS for payroll tax payments and reports. that registration involves signing up for the Electronic Federal Tax Payment System (EFTPS). The IRS doesn't accept paper checks, so this is the only way to pay your payroll taxes. 

Preparing for New Hires - State Registrations

You will need to register with several departments in your state before you begin hiring new employees: 

You must register with your state for income taxes, so you can collect state income taxes from employee pay and report and pay those taxes to your state. 

In addition, you'll need to register as an employer with your state's employment bureau so you can pay unemployment taxes and worker's compensation taxes. 

Finally, you must give information about all new employees to your state's new hire reporting website. The states use this information to track employees to be able to garnish wages for child support. 

How Do I Calculate Payroll Tax Deductions?

Your first responsibility as an employer is to calculate withholding for payroll taxes - federal income tax, FICA (Social Security/Medicare) taxes, and state income taxes.  This article takes you through the process of making these calculations.

How and When Must Payroll Taxes Be Paid to the IRS?

Payroll taxes are paid to the IRS (which distributes the Social Security/Medicare information to the Social Security Administration. These payroll tax deposits must be made electronically. through the EFTPS system. 

Payroll taxes which you have collected are paid to the IRS either semi-weekly or monthly, based on the total amount of payroll taxes you owe.  If you have only a few employees and a small payroll tax liability, you pay monthly; if you have many employees and a larger payroll tax liability, you pay semi-weekly.   

Here's a yearly payroll tax calendar so you can see when to send reports and make payments. This calendar doesn't include state payroll taxes.

How and When are Payroll Tax Reports Filed with the IRS?

You must file a report each quarter with the IRS on Form 941 - Employer's Quarterly Federal Tax Return.  This return shows:

  • The amount you have collected for income tax withholding from employees
  • The amount you have collected for FICA (Social Security/Medicare) from employees,
  • The total amount owed for FICA (including the employer portion of this tax)

You must also include the amounts you have deposited (monthly or semi-weekly) for these payroll taxes.  If your deposits are less than the amount owed, you must pay the IRS.  Form 941 is complex; take some time to read the details in this article.

How Do I Set Up a Payroll System to Make Sure I Don't Forget Anything?

 If you want to do your own payroll, you'll need to take all of this information and set up a system, from A to Z, beginning with those new hire forms, and including paying employees, submitting reports and payments to federal and state agencies.  

This article will walk you through the steps for setting up your DIY payroll and payroll taxes. 

Overwhelmed? Consider a Payroll Processing Service

If all of this seems to much for you, consider hiring a payroll processing service. They can take over all of these tasks, for multiple states and localities and reports.