Payroll Taxes: Your Obligations and How to Meet Them

Payroll taxes can be one of the more confusing responsibilities a business owner faces, but they can't be avoided. It's important for employers to get a grasp on the subject so they can fulfill obligations to both their employees and the government.

Payroll taxes are taxes that employers and employees must pay on wages paid. Employers share of taxes (ER portion) and employees’ taxes (EE portion) are remitted to government agencies.

In this article, we’ll discuss the different types of payroll taxes and the basics of calculating them, payroll tax reporting and payment, and some recent payroll tax changes.

Types of Payroll Taxes

Payroll taxes involve some powerful forces, including the Internal Revenue Service (IRS), Social Security Administration (SSA), and state and local governments. The taxes—also called employment tax—include federal income tax, social security tax, Medicare tax, and state and local taxes.

• Federal income tax. The federal government taxes income at a variety of rates. Employers are required to deduct federal income tax withholding from their employees' paychecks based on their income and the number of allowances claimed on their W-4 form.
• Social security tax. This tax funds the Social Security program, which provides retirement, disability and survivor benefits to eligible individuals. The Social Security tax rate is currently 6.2% and is applied to the first $160,200 of an employee's wages.
• Medicare tax. Medicare taxes fund the Medicare program, which provides health insurance to individuals 65 and over and people with certain disabilities. The Medicare tax rate is currently 1.45% and is applied to all of an employee's wages.
• State and local taxes. Employers are also required to withhold state income tax and local taxes from all employees' paychecks each pay period. These taxes vary by state and locality and can include income tax, disability insurance and unemployment insurance.
• Self-employment tax. The current self-employment tax rate is 15.3%—a 12.4% contribution to Social Security and a 2.9% payment to Medicare. Additionally, there is a 0.9% surtax to Medicare for any earnings that go above $200,000. This 0.9% tax also applies to employees, not just self employment.

Calculation of Payroll Taxes

Calculating payroll taxes can be a daunting task. Payroll software can handle these calculations quickly and accurately. Still, it's good to understand how the numbers are processed. Here are the basic steps for a payroll tax calculation:

• Calculate employee gross pay. Employee gross pay is the total amount of money an employee earns in a pay period before taxes and other deductions.
• Calculate federal withholding. Employers must withhold federal income taxes from their employees' paychecks based on their income and the number of allowances or tax credits claimed on their W-4 form.
• Calculate FICA. FICA stands for the Federal Insurance Contributions Act. FICA taxes include social security and Medicare taxes. Employers are required to withhold 6.2% for social security tax and 1.45% for Medicare tax from their employees' paychecks. Then, employers must contribute an additional 6.2% for social security tax and 1.45% for Medicare tax on behalf of employees.
• Calculate state and local tax. Employers must also withhold state and local taxes from their employees' paychecks based on their state and locality's tax rates.
• Subtract payroll deductions and reimbursements. Employers must subtract any payroll deductions, such as retirement contributions and health insurance premiums, from their employees' gross pay. Employers must also add any reimbursements, such as travel expenses, to their employees' gross pay.
• Calculate a paycheck. After subtracting payroll deductions and adding reimbursements, employers must calculate their employees' net pay or take-home pay.
• Calculate FUTA and SUTA. FUTA stands for the Federal Unemployment Tax Act and SUTA stands for State Unemployment Tax Act. Employers must pay a federal unemployment tax of 6% on the first $7,000 of an employee's wages. Employers must also pay state unemployment tax, which varies by state.
• Total tax payments required. Employers must add up all of the taxes and employer contributions they are required to pay on behalf of employees.

Payroll Tax Reporting and Payment

Payroll tax reporting and payment are essential responsibilities of employers. Failure to comply with employer payroll tax requirements can lead to serious penalties and fines. In this section, we'll explore the responsibilities of employers when it comes to payroll tax reporting and payment, the deadlines involved and the penalties for non-compliance.

Responsibilities of employers

As an employer, you have several responsibilities when it comes to payroll tax reporting and payment. First, you must calculate and withhold the appropriate payroll taxes from your employee’s paychecks, including federal income tax, Social Security tax, Medicare tax, and any state or local employment taxes. You must also match your employees' Social Security and Medicare taxes and make your own contributions to these government programs.

In addition to calculating and withholding federal and state payroll taxes, you must also report them to the appropriate government agencies. This includes filing quarterly and annual payroll tax reports, as well as issuing W-2 forms to your employees each year. You may also be required to make additional payments, such as state unemployment taxes, on a regular basis.

Deadlines for payroll tax reporting and payment

The deadlines for payroll tax reporting and payment vary depending on the type of tax and the size of your business. For example, small businesses may be required to file and pay payroll taxes on a monthly basis, while larger businesses may have quarterly or annual filing requirements.

The IRS and other government agencies typically provide deadlines and due dates for payroll tax reporting and payment, and it's important to keep track of these dates to avoid penalties and fines. Failure to file or pay on time can result in late fees, interest charges and other penalties.

Penalties for non-compliance

The penalties for non-compliance with payroll tax reporting and payment requirements can be severe. In addition to late fees and interest charges, employers may face fines, legal action and even criminal charges.

For example, if you fail to withhold payroll taxes from your employees' paychecks or fail to make required contributions, you may be subject to a penalty equal to the amount of taxes owed. You may also be subject to penalties for filing late, submitting incomplete or inaccurate information, or failing to provide W-2 forms to your employees.

Payroll Tax Changes

Payroll tax regulations change on a regular basis, and employers must stay up-to-date to avoid penalties and fines.

The federal government—as well as state and local tax agencies—may make changes to tax rates, wage base limit or caps, income taxes and brackets, and other payroll tax-related rules based on economic conditions, changes in the laws, and other factors.

For instance, the Social Security tax wage base for employees increased for 2023, going from $147,000 to $160,200. Medicare tax also changed, applying to all wages at a rate of 1.45% for both employers and employees. The earnings base for self-employment tax also increased to $160,200 this year with an effective rate of 15.3%.

Employers must keep track of these changes and adjust their payroll processes accordingly to ensure that they are accurately withholding and paying payroll taxes. Failure to comply with payroll tax regulations can result in significant penalties, ranging from fines, interest charged on back taxes, liens against property, civil and/or criminal sanctions, and even jail sentences. Any fees charged will increase the longer the payments are past due.

Employers and self-employed people should keep up with payroll tax changes. They can regularly check government websites and publications, consult with tax professionals and keep records of all payroll tax-related transactions.

Working with an HR service like TriNet can relieve a business of the trouble of handling payroll taxes and keeping up to date with ever-changing rules and regulations. And, as any business owner can appreciate, it can save you time and money in the long run.

With TriNet on your side, we’ll calculate and withhold federal, state and local payroll taxes paid through our platform—and we’ll electronically submit withholdings. We can also handle your payroll administration tax documents, including electronic W-2 preparation and delivery, and employees can choose to import their W-2s directly into TurboTax.® TriNet will even manage unemployment taxes and claims for you.