Payroll taxes are taxes employers withhold from employees' pay and remits on behalf of employees and themselves to the appropriate taxing agencies. As an employer, you are expected to collect and pay these taxes through your payroll process.
Payroll Tax Inclusions
U.S. Federal payroll taxes include a few components, as follows:
- Federal Income Tax Withholding: These are taxes withheld from employee pay for federal income taxes owed by the employees. The amount of federal income tax is determined by information employees provide on the Form W-4 they complete when hired. This form can be changed by the employee at any time and as often as the employee wishes.
- Social Security and Medicare: Called FICA taxes (Federal Insurance Contributions Act), this tax is shared between employees and employers. The employer deducts the employee's share, which is one-half the total due, from employee wages/salaries, and the employer pays the other half.
- Additional Medicare Tax: Added in 2013 as part of the Affordable Care Act, employers withhold 0.9% Additional Medicare Tax on employees' earnings that exceed a threshold. This medicare tax has no employer match.
- Federal Unemployment (FUTA) Tax: This tax is paid separately from the other taxes and isn't withheld from employee pay.
- Self-Employment Tax: This is basically social security and Medicare for self-employed individuals.
Tax laws can change, so be sure to check with the Internal Revenue Service or a tax professional for the most current tax information.
Payroll Tax Process
An employer calculates the gross pay for an employee, then, based on the employee's gross pay, deducts a specific amount for federal income tax, based on the W-4 form the employee has completed most recently and deducts a specific amount for FICA taxes.
Employers are required to deposit federal income tax and social security and Medicare taxes, monthly or semi-weekly based on the schedule they choose before the beginning of the tax year. FUTA tax deposits are due for the quarter of the year that tax due exceeds $500.
The Internal Revenue Service provides an Income Tax Withholding Assistant to help you determine how much tax you need to withhold and report as an employer.
FICA Tax Withholding Rates
The employee tax rate for social security is 6.2%. The employer tax rate for social security is also 6.2%, or 12.4% total. The Social Security portion of the tax is capped each year at a maximum wage subject to Social Security.
The employee tax rate for Medicare is 1.45% and the employer tax rate for Medicare tax is also 1.45%, or 2.9% total.
The Additional Medicare tax of 0.09% is withheld on income above $200,000 each. There is no employer match for this tax.
State Payroll Taxes
State payroll tax varies from state to state. Most states, but not all, collect tax on income. Some don't collect tax on wages but do collect on other forms of income, such as investment dividends. In addition, some states withhold additional payroll taxes for:
- State unemployment tax funds
- State disability funds
- State worker's compensation funds
State payroll taxes apply to your business depending on where your employees work.
State Tax Information
Check with your state's tax agency for details on what types of income are taxed and how to collect and remit payroll taxes.
How Employers Pay Payroll Taxes
The payroll tax process involves depositing and reporting taxes to the IRS. After the employer has calculated the amounts for federal income tax withholding and FICA taxes, and withheld these amounts from employee paychecks, they must:
- Calculate the amount they, as a business, must pay for FICA taxes, and set aside those amounts
- Make payments to the IRS either monthly or semi-weekly, based on the size of their total employee payroll
- Report on payroll taxes quarterly using Form 941 or through e-file
Reports and deposits are due by specific dates, and if an employer does not remit payroll taxes or sends them in late, the company could be subject to monetary fines. These start at 2% of the past-due amount for payments up to five days late. The penalty increases, up to 15% if the company is past 10 days of non-payment, and the IRS has had to send out a payment notice.
The Internal Revenue Service has a great deal of information as well as helpful tools to guide you through payroll taxes, including calculation assistants, tax tables, and video tutorials.