Payroll can be a complex and time-consuming process, especially if you are a small business owner juggling multiple responsibilities. You need to make sure your payroll calculations are correct, you have to pay your employees regularly and on time, and you need to comply with all federal, state, and local tax laws to keep your business running smoothly and avoid costly fines and audits. Most importantly, you need to make sure you file and report all employer payroll taxes, which can be a struggle as there are various types of taxes, all with different deadlines and specific reporting requirements.
So, where do you start, then? Which employer payroll taxes do you need to pay and how do you calculate tax rates and file your payroll tax returns?
Fear not, we’re here to guide you through the process. In today’s comprehensive guide, we will share everything you need to know about employer payroll taxes so that you can manage your payroll with confidence and ease. We will cover the different types of payroll taxes, how to calculate them, filing requirements, and the tools and resources that will help you stay compliant.
What are Employer Payroll Taxes?
Let’s start by taking a look at exactly what we mean by employer payroll taxes. These are federal, state and local taxes that an employer withholds from an employee’s salary. Employers deduct calculated amounts from an employee’s wages in line with tax rates and salary and pay the withheld amounts directly to the Internal Revenue Service (IRS) on the employee’s behalf. Most jurisdictions require employers to report these statutory deductions quarterly and annually.
As well as withholding and remitting taxes, employers must also maintain accurate records of all payroll activities. This includes documenting paid wages, withheld taxes, and all payments made to tax authorities. As a result, it’s important for employers to maintain accurate records for compliance and for handling any audits or inquiries from tax authorities. Employers are also responsible for staying informed about changes in tax laws and regulations to ensure ongoing compliance.
Types of Employer Payroll Taxes
In the United States, there are numerous employer payroll taxes and deductions. Let’s take a look at some of the main paycheck deductions that, as an employer, you need to be aware of.
Federal Income Tax
Federal income tax is a tax on workers’ salaries or companies’ profits that is paid to the US government. Here’s how the IRS defines income tax: “Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes).”
The United States uses a progressive Federal income tax system. That means the higher an employee’s income is, the more tax they will pay. For instance, an employee earning less than $44,725 a year will pay tax at a rate of 12%. An employee earning more than $578,126 per year will pay this tax at a rate of 37%. Employees earning less than $11,000 do not pay any Federal income tax. Earnings are understood as the total remuneration, including salary and benefits.
Strictly, speaking, this type of tax is not classed as one of the standard employer payroll taxes, but it plays a significant role in the overall payroll process so it’s worth mentioning here.
So, what exactly is the difference between payroll and Federal income tax? Whereas payroll taxes (which we will explore next) are used for specific government social insurance programs, federal income tax withholding goes to the government’s general fund. The government social insurance programs referred to here are social security, healthcare, unemployment benefits and workers’ compensation. Not only that, but in some jurisdictions including California and New York, state governments will take a small cut from the wage tax. This is used to contribute to the maintenance and improvement of local infrastructure programs. These could include, road, park and recreation maintenance.
Social Security and Medicare Taxes (FICA)
Now let’s move onto U.S. employer payroll taxes, starting with FICA.
Employers need to pay Social Security and Medicare taxes for all employees. These are collectively known as FICA taxes (Federal Insurance Contribution Act). In terms of rates, FICA tax brackets are split according to the amount of money earned, and tax rates range from 10-37%. Employers pay 50% of the total tax owed, and employees pay the other 50%.
Social Security
Social security employee tax is paid by both the employee and employer. The money paid into this goes into two different trust funds: Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI). The first is for retirement and survivor benefits, whereas the latter is for disability benefits. It acts as a safety net for the retired and disabled.
Medicare Insurance
Tax for medical is paid by both the employee and employer. Medicare withholding also goes into two separate trust funds, the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund. This is primarily used to help with medical fees workers may need to pay throughout their lives.
Federal Unemployment Tax (FUTA)
Employers also have to pay Federal unemployment taxes (FUTA). This is an employer-paid tax. In other words, these taxes are not deducted from an employee’s paycheck. Instead, they are paid directly by the employers.
The Federal Unemployment Tax Act (FUTA)
FUTA is the federal withholding tax that provides compensation to workers who have lost their jobs. This is conducted at a federal level, as opposed to the state level of SUTA. Employers pay both federal and state unemployment taxes.
Retirement Programs
In addition to employer payroll taxes related to unemployment, individual companies can set up their own retirement program with employees in which they pay a portion of their salary into overtime. This builds up to form a pension pot that they will have access to once they retire. Rates of deduction vary between companies and individuals.
State Income Tax
State income tax is a tax levied by individual states on the income earned by residents and (sometimes) non-residents within the state. Each state has its own regulations, tax rates, and brackets, which can vary widely. Some states have a flat tax rate, while others use a progressive system. A few states, like Florida and Texas, do not impose a state income tax at all.
Employers are responsible for withholding the appropriate amount of state income tax from their employees’ paychecks and remitting it to the state tax authority. Compliance with state income tax laws is crucial to avoid penalties and ensure accurate financial reporting.
State Unemployment Tax (SUTA)
SUTA tax is another employer payroll tax that businesses have to pay, referred to in certain states as State Unemployment Insurance (SUI) or reemployment tax. The State Unemployment Tax Act (SUTA) was established to offer unemployment benefits to displaced workers. In most states, this is funded by employers only.
SUTA rates differ between states. For instance, Florida unemployment tax rules state that the rate employers pay is calculated as a percentage of the first $7,000 of each employee’s annual wages. This is known as the taxable wage base. When you register as an employer, your state will tell you what your SUTA tax rate is.
Local Taxes
Finally, you also need to determine if your city or municipality requires you to withhold any local employer payroll taxes. These taxes are paid by both the employee and employer and vary in rates depending on location. They are used to pay for local maintenance and improvements.
For example, in Philadelphia, there is a local payroll tax known as the Philadelphia Wage Tax. This tax is withheld from both residents and non-residents who work in the city. Employers are responsible for withholding this tax from employees’ wages and remitting it to the city. Rates vary depending on whether the employee is a resident or a non-resident. These taxes are used to fund local services and infrastructure improvements, including public safety, parks, and recreation facilities.
How to Calculate Employer Payroll Taxes
Calculating employer payroll taxes at the end of each pay period (for example, every 2 weeks if you offer biweekly pay) can be a daunting task for small business owners, but it’s essential for staying compliant with federal, state, and local tax laws. Here’s everything you need to do to accurately calculate and manage payroll taxes.
Collect Employee Information
Gather all necessary information, including employees’ wages, tax withholding forms (W-4), and any pre-tax deductions (e.g., health insurance premiums, retirement contributions).
Establish Gross Pay
Determine the total earnings for each employee, including salary, hourly wages, overtime, bonuses, holiday pay and commissions.
Determine Taxable Wages
Subtract any pre-tax deductions from the gross pay to determine each employee’s taxable wages.
Calculate Federal Income Tax
Use the IRS tax tables or an online tax calculator to determine the amount of federal income tax to withhold from each employee’s wages based on their W-4 form.
Calculate FICA Taxes
This includes Social Security and Medicare. For Social Security taxes, multiply the taxable wages by the Social Security tax rate (6.2% for both employer and employee). For Medicare, multiply the taxable wages by the Medicare tax rate (1.45% for both employer and employee). Remember to apply the additional 0.9% for employees earning above a certain threshold.
Apply Federal Unemployment Tax (FUTA) Rate
Multiply the first $7,000 of each employee’s wages by the FUTA tax rate (typically 6.0%, reduced by credits for state unemployment taxes).
Apply State Unemployment Tax (SUTA)
Apply the state-specific SUTA rate to the taxable wages up to the state’s wage base limit. Rates and wage bases vary by state.
Withhold State and Local Taxes
Use state and local tax tables to determine the appropriate withholding amounts for state and local income taxes.
Calculate Employer Payroll Tax Liability
Finally, calculate your employer payroll tax contribution. Simply add the employer’s portion of FICA taxes, FUTA, SUTA and local taxes to the withheld amounts to get your total payroll tax liability for each employee. Once you’ve done that, all that’s left is filing the required payroll tax forms (e.g., Form 941 for federal taxes, state and local forms) and paying the taxes by the due dates to the respective tax authorities.
Filing Payroll Tax Returns
The final crucial step in the process for calculating employer payroll taxes, as we just saw in the previous section, is filing and paying your federal employer payroll taxes.
You must use the following common tax forms for this:
- Form 941. Also known as the Employer’s Quarterly Federal Tax Return. You use this form to report any federal income tax, Social Security tax, and Medicare tax. You can also use this form to pay all Social Security and Medicare taxes that you owe directly as an employer.
- Form 940. Also known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return. You use this form to report and pay federal unemployment taxes.
- Form W-2. Also known as the Wage and Tax Statement. You use this form to report annual wages and paycheck deductions. You must give this form to each employee at the end of each tax year. You must then provide a copy of each completed form to the Social Security Administration.
- Form W-3. Also known as the Transmittal of Wage and Tax Statement. You must submit this form to the Social Security Administration together with your W-2 Forms. Essentially, the W-3 summarizes all federal employee tax withholdings.
- Form 1099-NEC. Also known as the Nonemployee Compensation Form. If you have paid independent contractors or freelancers more than $600 over the fiscal year, you must use this form to report all payments.
So how can you access these forms and where do you need to file them? And what are the deadlines for filing the different employer payroll taxes?
You can access all tax forms from the IRS website. Most forms can be filed electronically through the IRS e-file system or mailed to the appropriate IRS address, which can be found in the instructions for each form.
Deadlines for Filing Employer Payroll Taxes
Here are the deadlines for filing different forms for employer payroll taxes:
- Form 941. Due quarterly on the last day of the month following the end of the quarter (e.g., April 30 for the first quarter, July 31 for the second quarter).
- Form 940. Due annually by January 31 for the previous year.
- Form W-2 and Form W-3. Must be filed with the Social Security Administration by January 31 for the previous year.
- Form 1099-NEC. Must be provided to the recipient and filed with the IRS by January 31 for the previous year.
Maintaining Accurate Employer Payroll Tax Records
All that’s left, now that you’ve filed and paid all employer payroll taxes, is making sure that you maintain accurate and up-to-date employee tax records. This is essential for both state and federal compliance. Your records must detail all paid wages, withheld taxes, and processed tax payments. Keep a record of all this information for at least four years to comply with both federal and state law requirements. That way, you’re prepared for any potential tax audits or investigations.
The best way to ensure your employee tax records are complete and up to date is by using employee record management software. Employee record management software is a digital employee file management system that makes it easy to store, locate and manage employee data.
Think of it like an electronic filing application that helps you record and track all your professional employee data using seamless processes that help your organization run more smoothly. Instead of searching for an employee’s paper file in a huge filing cabinet, you just access their profile from an intuitive platform, and you have all the tax data you need at your fingertips.
It’s also a good idea to conduct periodic audits to ensure that your employer payroll tax records are accurate and up to date. That way, you can catch any discrepancies early, make necessary corrections promptly, and maintain compliance with all tax regulations. Regular audits also help you identify any areas where your payroll processes can be improved, ensuring your business runs efficiently and remains prepared for any potential tax audits or investigations from federal or state authorities.
Tools and Resources for Managing Employer Payroll Taxes
Finally, we cannot stress enough how important it is to use a reliable payroll software solution to streamline the process of calculating employer payroll taxes. These tools automate many aspects of calculating payroll, including calculations and tax deductions. Solutions such as Factorial’s payroll software even help you file your forms with the government. As a result, you don’t have to worry about missing any important employer payroll tax deadlines. Instead, you can rest assured that your business is compliant, and you can refocus your efforts on more strategic aspects of your business.
Specific features included in Factorial’s payroll software:
- Automated tax withholding. The software automatically calculates all federal, state, and local tax withholdings based on the latest regulations.
- Integrated tax filing. File your payroll tax returns electronically (e.g., Forms 941, 940), directly from the platform.
- Real-time compliance updates. Keep up-to-date and compliant with real-time updates on tax law changes and rate adjustments.
- Comprehensive reporting. Generate detailed reports for payroll, tax withholdings, and contributions, making it easy to track and review financial data.
- Employee self-service portal. Give your employees access to their tax documents, pay stubs, and personal information, reducing your administrative workload.
- Customizable settings. Customize the platform to fit the specific needs and requirements of your state and locality.
Ultimately, Factorial’s payroll software helps you manage your employer payroll taxes more effectively, ensuring accuracy, compliance, and efficiency in your payroll processes.
