What are Payroll Taxes and How Do They Work?

Many business owners already have some kind of accounting help, whether it’s a bookkeeper or software, but even with assistance, paying employees can be tough.

People who are going to be handling their payroll themselves and don’t want to make any payroll mistakes need a good grasp of employer payroll taxes.

What are employer payroll taxes?

Employer payroll taxes are levies that businesses face when they employ people. Some of these taxes are levied on both the employer and the employee; others are paid only by employers. Some examples are Social Security tax, Medicare tax and unemployment taxes.

Employer payroll tax defined. Employer payroll taxes are taxes that businesses pay when hiring workers. Some are paid by the employer and the employee, while others are paid only by employers. These might include Social Security tax, Medicare tax and unemployment taxes.

What payroll taxes are paid by employers?

Employers are required to pay payroll taxes each pay period. These include the following:

• Social Security: 6.2% for employees and 6.2% for employers on the first taxable earnings cap
• Medicare, which is taxed at 1.45% for employees and 1.45% for employer
• State Unemployment Tax (FUTA Credit) (Will vary by state)
• Federal unemployment, if less than 6% for the employer on the first $7,000 paid to the employee
• Social Security tax

The social security tax is 12.4%, split evenly between the employee and employer. This tax is capped each year on wage base of $176,100.

Medicare tax

The Medicare tax is 2.9 percent, split evenly between employer and employee. An additional 0.9% is imposed on employees who earn more than $200,000 a year. Employees only must pay additional Medicare tax.

State unemployment tax

For the appropriate unemployment tax rates, employers should consult state authorities. Usually, this tax is paid only by employers, although some states also collect contributions from employees.

Federal unemployment tax

The federal unemployment tax rate is between 0.6 and 6%, based on how much an employer pays in state unemployment tax. It is paid only by employers.

How to calculate federal payroll tax deductions

Federal Income tax (Unlike the flat rate FICA taxes, figuring your Federal income tax due is a little more complicated.

• The adjusted wage amount for the employee
• The amount to be withheld from certain wage brackets as set forth in tables contained in Publication 15-T
• Any tax credits that the employee is claiming
• Bonus payout in excess of the amount already withheld pursuant to section 3(1) (Other nominal amounts)-Any additional withholding requested by employee.

Using the IRS wage bracket calculation method, it can be calculated using corresponding combined income amounts for an employee who makes no more than $100,000 per year and has already completed the updated 2020 Form W-4:

Adjust employee’s wage amount

Employee’s Wages Notice that an employer might need to adjust a wage when the employee has completed Step 4 of Form W-4.

To do this, take any other additional income (that’s not a second job), divide it by the number of pay periods and add it to the total wages.

If the employee is not taking standard deductions but some other type of deduction, then divide this number by pay periods and subtract it from wages.

Determine the tentative withholding amount

After you correct the employees’ wages, figure each employee’s tentative withholding using the wage bracket tables in Publication 15-T. Beneath each, compare adjusted wage ranges from the left two columns to the filing statuses in the six rightmost columns.

So, for instance, on a post-tax rate of $900 per week and filing as head of household with standard withholding an employee’s tentative withholding amount would be $60.

Account for tax credits

Employees were once able to claim allowances for children and other dependents on their W-4 form, but in 2020 the I.R.S. streamlined the process. And now, on Line 3 of Form W-4, employees have a full credit amount for dependent claims. Take this amount and divide it by the number of paydays then subtract that amount from the tentative withholding.

Tally the final withholding amount

Additional income tax may be withheld from each pay period by crossing out Step 4(c) in Form W-4 and writing in the additional amount. I’ll put that on top of what they are withholding.

Please be aware that different calculation methods can apply based on the employee’s overall annual earnings. However, taxpayers earning more than $100,000 might need to use the IRS percentage method rather than the wage bracket method. The IRS pub 15-T for reference.

“If those are too daunting to stay on top of, employers can go to payroll software providers, like ADP. We can calculate, file, deposit and reconcile payroll taxes on behalf’s our clients relieving them from making errors and staying compliant.

Other employer payroll tax requirements

As pay periods go by and tax money — both from employees’ paychecks and in employer contributions — is withheld, businesses might have to file quarterly tax returns with federal, state and local governments.

The deadline for filing IRS Form 941, Employer’s Quarterly Federal Tax Return is usually the last day of the month after the end of a quarter. So, if March 31 is the end of the first quarter of the year, then the first Form 941 would be due April 30. You can pay with EFTPS.

Employers are typically obligated to issue Forms W-2 to employees and Forms 1099-MISC to independent contractors after the year is done. They may also need to file three additional forms:

• W-3 – summary of total W-2 wages for all employees submitted to the Social Security Administration
• Form 1096 – a summary form that reports information and transmits the other IRS forms
• Form 944 – when you file taxes annually as an employer, rather than quarterly

Payroll tax vs. Income tax

The tax is a payroll tax that applies to employers and employees. It’s intended to help pay for Medicare and Social Security. Payroll tax contributions from employers are typically paid directly to the government, while employees have payroll taxes withheld from their paychecks.

Taxes on income, on the other hand, apply only to an individual’s remuneration and wages. It is taken out according to tax brackets the IRS has in place.

The government then spends the income taxes it receives on a range of public services and programs, such as public schools and maintaining highways.

Getting help with employer payroll taxes

With numerous variables to juggle, employer payroll taxes can become convoluted in short order. That is why many business owners choose to hire a payroll administrator or outsource the work to a payroll service provider who can automate this process saving time.

The Payroll Company, for example, helps businesses with automation of tax deductions to reporting and filing taxes in all 50 states in the US.