Your Payroll Tax Responsibilities as an Employer
Payroll Tax Withholding, Reporting, and Payment Responsibilities
Paying payroll taxes is one of the least fun activities of any business with employees. But taxes are a fact of life today, so it's best to just do as we're told.
In this article, I'll review some of your major responsibilities for payroll taxes, including withholding, Social Security and Medicare taxes, FICA taxes), unemployment taxes, and other deductions.
What are Payroll Taxes?
Payroll taxes (sometimes called employment taxes) are those taxes you have to consider when you pay employees. Some of these taxes are withheld from employee pay, and others are your responsibility as an employer.These taxes include:
- Withholding federal, state, and local income taxes from employee paychecks
- Withholding FICA taxes from employee paychecks and paying an equal amount as an employer.
- Paying unemployment taxes based on employee pay.
- Paying amounts to state and federal worker's compensation funds, based on employee pay.
Your Responsibilities for Payroll Taxes
As a business with employees, you have certain important responsibilities relating to payroll taxes. Having an understanding of these responsibilities will help you in making certain that you comply with the law. All employers must:
- Withhold (take out) appropriate taxes from employees. These taxes include the federal, state, and local income taxes the employees must pay, FICA taxes withheld from employees and also paid by you as the employer. You as the employer must withhold the income taxes as the employee has designated; FICA taxes are deducted as a percentage of gross pay.
- Set aside funds for these payroll taxes, including both employer and employee portions of Social Security/Medicare, and employer liabilities for unemployment taxes and worker's compensation.
- Pay the taxes to the appropriate agency. This includes both employee taxes and employer taxes. For example, you will pay both the federal income tax withholding and Social Security/Medicare amounts to the IRS. You must also pay the FICA taxes you collected from employees, along with your own portion of the FICA taxes as an employer.
- Report tax liabilities to appropriate agencies and to employees, as specified by law. These reports include Form 941 - Employer's Quarterly Wage and Tax Report, and Form 940 - Unemployment Tax Report.
- Provide other reports to federal, state, and local agencies as required. For example, you must report the employment status of all new employees.
Personal Responsibility for Payroll Taxes
Having a business, even a corporation, does not relieve individuals of the personal responsibility if payroll taxes are not paid. For example, if you are a single-member LLC, the LLC business structure doesn't shield you from personal responsibility.
Penalties for Non-payment of Payroll Taxes
Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment [payroll] taxes.
Fines and penalties for failure to report and file are steep, even if the failure is not determined to be willful.