Payroll taxes are an important aspect of business operations as they help fund essential services like healthcare and social security.
Whether you are just starting out as a business owner, have questions, or are looking for ways to optimize your payroll tax process, this comprehensive guide will help you stay informed and compliant at all times.
Businesses should follow the below list of best practices in order to avoid penalties and other issues when filing payroll taxes. Let’s dive in!
what is payroll tax?
Payroll taxes are a vital component of business operations, affecting both large and small companies. These taxes include federal income tax, state income tax, unemployment insurance tax, and more.
To your employees, payroll taxes are just denominations on every pay stub. But to you, payroll taxes are a tax levied by federal, state, or local governments to help fund public programs.
Payroll tax examples include Medicare, a program that provides health coverage for adults over age 65, and Social Security, which provides retirement income for adults age 62 and older.
Payroll taxes have flat rates and are sent directly to the program for which they are intended.
Here are the latest federal rates per employee:
- Social Security – 6.2%
- Medicare – 1.45%
- Additional Medicare – 0.9%
- Unemployment – 6% (0.6% with full credit reduction)
Income taxes are a bit different. Income taxes have progressive rates that vary with total income. These payments go to the U.S. Department of the Treasury, where they are used to fund various government initiatives.
Some payroll taxes have a wage base limit. Once that limit is reached, the tax is no longer deducted from the employee’s wages for the remainder of the year. Income taxes have no limit.
types of payroll tax
As we mentioned before, payroll taxes are levied by different levels of government. The breakdown below will show which deductions you should be making on your employee’s payroll.
federal payroll tax
Known as Federal Insurance Contribution Act (FICA), the federal payroll tax has two parts, Medicare and Social Security.
Medicare tax is split evenly between employers and employees and doesn’t include an earnings limit. Some employees who make more than $200,000/year may be required to pay additional Medicare taxes that you as an employer don’t have to match. The current FICA tax rate is 15.3%. This is paid evenly between employers and employees, amounting to 7.65% each, per payroll cycle.
Social Security tax is also shared between employers and employees, with each paying half of the total liability until the employee reaches the wage base limit of $147,000/year.
unemployment taxes
Employers pay federal unemployment tax (FUTA) on the first $7,000 that each employee earns. The wage base limits can vary, but only for state unemployment programs. In a select few states, employees also contribute to the tax. Employers can get a lower federal unemployment tax rate by paying their state unemployment on time.
state and local payroll tax
Some states and municipalities may have additional payroll taxes. These taxes go towards short-term disability, paid family medical leave, and other programs. If you’re unclear as to whether or not you should be making these deductions please consult your local authorities for specific requirements.
how to calculate payroll tax?
In order to calculate payroll taxes, it’s important to understand the different rates for each type of payroll tax and any special considerations or deductions that may apply.
FICA taxes are paid either monthly or bi-weekly. Your payment schedule depends on your tax liability during a lookback period. FUTA taxes are usually paid quarterly. To make your payments, you may use the Electronic Federal Tax Payment System (EFTPS) or use an accounting service like Countick to file for you.
Your business must also report how much federal payroll tax you withhold and pay throughout the year.
For FICA, this is done quarterly, but in some cases where the tax liability is small, it may be done annually. FUTA taxes are reported annually.
Payroll taxes are calculated by multiplying your employee’s gross taxable wages against the applicable payroll tax rate. These calculations are usually simpler than those for income tax. The rates for payroll taxes are flat and withholding certificates aren’t necessary.
It’s important for your business to stay up-to-date on any changes or updates to tax laws in their area or industry. These changes can be easily found online on your state website or the IRS.
the purposes of payroll tax
As we mentioned before, payroll taxes help to support the broader community and ensure the long-term sustainability of vital government services. Payroll taxes can also provide business owners with certain tax benefits and incentives, such as reduced business tax rates or access to valuable tax credits.
FICA taxes are considered a type of trust fund tax because they are deducted from wages and held by the employer until deposited to the proper level of government. A compliance violation can expose your business to the trust fund recovery penalty (TFRP). When the business responsible for collecting and paying payroll taxes fails to do so, infractions occur. To avoid this, you’ll want to implement the below practices:
- Work with an accountant or payroll software to ensure accurate calculations and on-time filings
- Stay up-to-date on any changes or updates to tax laws
- Seek out valuable tax benefits and incentives
- Maintain strong communication and collaboration with all stakeholders involved in your business’s payroll process
- Classify employees correctly
- Pay taxes on time
- Use the correct forms when filing your tax reports
By taking these steps, you can ensure the success of your business and avoid any unwanted headaches with the IRS.
how Countick can help
Payroll is simultaneously time-consuming, error-prone, and critical to the success of your business.
The Countick team is familiar with all local, state, and federal compliance rules so you don’t have to be. We handle direct deposit, online portal access for employees, year-end compliance, and reporting to make your life and your employees’ lives less stressful.
By automating your calculations and remittances right from the start, you’ll be better prepared for reconciling and reporting at the end of the year. Countick can automatically pay your employees and contractors, file your taxes, help with compliance, and identify hidden tax credits, saving you money to help ensure the continued prosperity of your business well into the future.
If you’re looking to avoid the confusion and headaches of any business-related taxes, check out our pricing page to see what Countick can do for you!
