Employer Payroll Taxes

There comes a time for most businesses when there is a need for labor beyond what the owner(s) can provide. Hiring employees comes with the responsibility for withholding income and payroll taxes from employees’ wages and remitting those taxes to the Federal, and in most cases, state governments. Additionally, there are taxes paid by the employer.

Federal Payroll Taxes

Publication 15-T provides detailed guidelines on how much income tax to withhold, based upon the appropriate method and the employee’s elections on Form W-4. Along with income taxes, employers also withhold an employee’s portion of Social Security and Medicare taxes from their wages. The current tax rate for Social Security is 6.2 percent paid by the employee and 6.2 percent paid by the employer. For Medicare, the current rate is 1.45 percent from the employee and 1.45 percent from the employer. These are the general rules and there are modifications necessary for high-wage workers.

Both the employee taxes withheld from wages and the employer matching Social Security and Medicare taxes are remitted to the U.S. Department of the Treasury using the Electronic Federal Tax Payment System (EFTPS) according to the IRS-determined timeline for the employer. It is very important to remit payments on time to avoid substantial penalties and interest.

Each calendar quarter, the employer is then required to file an informational return, Form 941: Employer’s Quarterly Federal Tax Return, with the IRS. Form 941 states the amount of wages paid to employees including any non-taxable payments to employees and detailing the taxes that were withheld from employee wages and the employer match for Social Security and Medicare.  At the end of the year, the employer must file a Form W-2, Wage and Tax Statement for each employee. These are sent, along with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration. The IRS and Social Security Administration then confirm that the totals for wages and taxes reported quarterly on Form 941 and annually on Forms W-2/W-3 match.

State Payroll Taxes

The majority of U.S. states also require that State income taxes be withheld from employee wages. In additional to withholding taxes, states require informational returns quarterly and/or annually reporting income taxes withheld. Each state varies in both the rates of income taxes and the method for determining how much to withhold from each employee’s check. Check your state’s website for additional information about when and how to withhold state income taxes.

Unemployment Taxes

Employers also report and pay taxes under the Federal Unemployment Tax Act (FUTA). The FUTA tax rate is 6.0 percent. The tax applies to the first $7,000 the employer pays to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. This is a tax paid by the employer and is not withheld from the employee. FUTA taxes are reported annually to the IRS on Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return.

Each state’s wage base varies, and each employer’s state unemployment tax rate can also vary. State taxing authorities determine and communicate these rates and any related filing requirement for state unemployment tax returns to the employer. It's essential that employers be on top of the general rules and any annual rate changes.

This is just the beginning of an employer's responsibilities when it comes to employees and payroll taxes.

Here are a few steps that you can take as an employer:

• Learn the basic rules by visiting the IRS website and your state’s employer websites.
• Mark your calendar with key dates. The IRS publishes an Employment Tax Due Dates page with information on what you need to do and when you need to do it.
• Contact your financial professionals at R&A CPAs for help and to learn about how you can stay compliant.

R&A's Client Accounting Services team can provide guidance. If you need help, contact your R&A advisor.