If you’re considering hiring employees, it’s critical that you understand the payroll tax obligations that you have as an employer. With all the confusion surrounding how payroll taxes works, failing to report taxes correctly can result in major issues with the IRS – so it’s worth it to have a basic understanding. But have no fear, this article is going to break down exactly what you need to know regarding how payroll taxes work.
How it works:
As the employer, you are responsible for collecting all payroll taxes and remitting them to the respective Federal and State tax agencies. Essentially the employer is the trustee, or middleman, of the employee’s taxes. If the employee taxes aren’t paid, then that is considered stealing, according to the IRS. Now you understand why the IRS takes this so seriously!
There are two separate categories for the tax portion: the employee portion and the employer portion.
Employee Taxes:
Whenever you pay an employee, the following taxes will be withheld from their paycheck:
- Federal income tax: Based on Form W-9 completed by employee
- Social security tax: 2% of wages (up to $132,900 of wages)
- Medicare tax: 45% of wages
- State income tax: Based on Form W-9
- Any local taxes
Upon employment, the employers have their new hire fill out a W-4 form. This form details their personal withholding’s, marital status and how their federal income is based. The federal withholding amount will be different for each employee (don’t worry – your payroll software will do the calculations for you). Social security and Medicare tax, also known as FICA taxes, are taxed at 6.2% and 1.45% rate, respectively. The social security tax portion is capped at wages of $132,900, however, there is no wage limit to Medicare tax. Finally, you have state income tax which is also based on Form W-9. Be sure to also check with your state tax agency to ensure that you are not missing any local taxes that differ from state to state.
These are the employee tax portions that every employer must withhold from every employee’s paycheck and then remit to the payroll agencies.
Employer Taxes:
Yes, the employers also have a payroll tax responsibility on behalf of their employees. The taxes that you hold for the appropriate agencies, in addition to withholding the employee’s payroll taxes, need to paid out:
- Social security tax: 2% of wages (up to $132,900 of wages)
- Medicare tax 45% of wages
- Federal unemployment tax (FUTA): 6% of wages (up to $7,000 of wages)
- State unemployment (SUTA):
- Other state local taxes
Did you notice that the Social Security and Medicare tax rates are the same for both employee and employer? That is due to the fact that Social Security and Medicare (FICA) are set a 12.4% combined rate. However, the employer and employee split and pay the amount down the middle. This is what the IRS requires.
Why It Is So Important You Ask?
As a business owner, knowing how the payroll functions and the reasons, are such a benefit to not only you, but also your employees. Understanding these facts will give you the knowledge you should have to answer any and all questions that your employees have about their wages and where their tax portion goes. But, if they need further explanation, we can always help with that too. So, give us call for those tougher questions.
