Listen, we’ve got it. Taxes are here like the winter—do you feel prepared? Are the windows shuttered, the dials set to 70, and the sweaters yanked out of storage? The same mentality extends to taxes, especially for your employees. The real question is: are you prepared?
At Joe Gormley, CPA in Princeton, NJ, we understand just how cold it can get—and how fast! I know our metaphors seem a bit dull, but here us out:
Do you know what’s going on with your payroll taxes this year?
The read deal is that even though you run a thriving business, do you know all the minute details that go into payroll taxes? There’s more than meets the eye, so that’s why you should Find a Professional for Payroll Taxes to save big this tax season.
In this article, let’s take a look at some basic principles about payroll taxes.
What are Payroll Taxes?
Payroll taxes are taxes imposed by the IRS on employees and their employers. The method of calculation is generally a percentage of salaries/wages that employers pay their staff. Payroll taxes can be put in two different categories:
Taxes on Wages
There are quite a few different taxes that employers and employees are responsible for. These include:
As an employer, you are generally responsible to withhold federal income tax from employees' wages and salaries. To calculate how much tax should be withheld, an employee’s Form W-4 can give you (or those responsible for your payroll) an idea about how to file for your federal income tax withholding. In addition, the IRS provides withholding tables detailed in Publication 15, Employer's Tax Guide.
Also, you are required to deposit your withholdings, with requirements explained in Publication 15. These can vary based on the amount of other withholdings and on the type of business that you run.
Part of Social Security and Medicare taxes from employees' wages must be withheld by their employers. The employer is responsible for paying a matching amount yourself. Figuring out how much tax you must withhold can be quantified by each employee’s Form W-4 and in the instructions in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide.
Like federal income tax, employers are also responsible to deposit the wages you withhold.
Beginning since January 1, 2013, employers are responsible for withholding the 0.9% Additional Medicare Tax on an employee's wages and compensation. This is applicable when wages and compensation exceed a threshold amount based on the employee’s filing status on their W-4. Employers are required to start withholding Additional Medicare Tax for the pay period in which they pays an employee’s wages and compensation in excess of the threshold amount. Contrasting with Social Security and Medicare taxes, there is no employer match for the Additional Medicare Tax.
Separate from Federal Income tax, Social Security and Medicare taxes, employers are required to report and pay FUTA tax (Federal Unemployment Tax Act). FUTA is a payroll tax paid by employers on their employee’s wages. The tax is 6.2% on the first $7,000 an employee earns; any earnings beyond $7,000 are not subjected to taxation. In practice, the actual percentage paid is around 0.8%.
To clarify, only employers pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. For more information, refer to Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide
Self-Employment Tax
Do you work for yourself? Then there’s a tax for you! It’s called the Self-Employment Tax (SE tax), which is a Social Security and Medicare tax aimed primarily for individuals who work for themselves or file as self-employed. The rates and process are typically similar to the aforementioned taxes.
Though self-employed persons typically handle the details of their business alone, one way to free more time up to concentrate on your self-employment is to Find a Tax Preparer that understands the intricate nature of your business. You may be paying more tax than you need.
Deductions from Wages
As mentioned before, figuring out how to file for yourself and employees must also take into account deductions. Generally, these are filled out on a W-4, so it is important for employers and employees to update these forms when changes are made to the status and filing responsibility of the employee. An employee’s rate of wages, marital status (single, divorced, married filing separately), and payroll frequency will affect the amount of federal taxes withheld from each paycheck. As a rule, each pay date is considered a separate event which requires a deduction for federal taxes and state taxes.
