Payroll Taxes
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Payroll Taxes
Anyone who has ever received a paycheck knows there are taxes withheld from their gross pay. These taxes are referred to as withholding taxes and generally include:
- Federal income taxes
- Social Security taxes
- Medicare taxes
- State income taxes.
Employees, employers, and self-employed persons pay social security and Medicare taxes.
When referring to employees, these taxes are commonly called FICA taxes (Federal Insurance Contributions Act). When referring to self-employed persons, these same taxes are referred to as self-employment taxes, which are figured on Schedule SE by self-employed individuals.
In addition to federal income taxes and social security and Medicare taxes withheld from an employee's pay, there are employment-related taxes that the employer is responsible for.
An employer may withhold state income taxes unless the state does not have a personal individual income tax.
Seven states do not have a personal income tax. Two other states don't tax wages, but do tax interest and dividend income
The following employment taxes must be deposited:
- Federal income taxes withheld from each employee's pay.
- Each employee's share of social security and Medicare taxes withheld.
- The employer's share of social security and Medicare taxes.
- Plus or minus any prior period adjustments to the employer's tax liability,
- Minus any advance EIC payments.
There are two deposit schedules for employment taxes:
- Monthly
- Semiweekly
These two schedules determine WHEN you must deposit the following taxes:
- Federal income taxes withheld
- Social security taxes
- Employee's and employer's share
- Medicare taxes
- Employee's and employer's share
These deposit schedules tell you when a deposit is due after a tax liability arises, for example, when you have a payday.
Generally, you must deposit employment taxes (i.e. federal income tax withheld, social security, and Medicare taxes) including Form 945 taxes by electronic funds transfer. However, there is an exception that allows you to pay employment taxes with your return (Form 941 or Form 944) instead of being deposited.
You are required to deposit 100% of your employment tax liability on or before the deposit due date. However, penalties will not be applied for depositing less the 100% if both of the following conditions are met:
Instead of depositing taxes, very small employers may be able to make their tax payments directly to the IRS when they file Form 941 (or Form 944) if one of the following applies:
- You report less than a $2,500 tax liability for the quarter on line 10 of Form 941, and you pay in full with a timely filed return.
For example, say you have only one employee, here's what to do for the first quarter (due April 30).
FUTA stands for Federal Unemployment Tax Act. Federal unemployment taxes (FUTA) are an employer-paid tax. FUTA tax is not withheld from an employee's gross pay.
The maximum wage base for computing FUTA tax is the first $7,000 of each employee's gross pay. When an employee's gross pay exceeds $7,000, no FUTA tax is assessed on the excess over $7,000.
If FUTA tax exceeds $500 in any quarter, you must deposit the tax by the last day of the month after the quarter the tax exceeds $500.
If during any quarter the FUTA tax is $500 or less, you do not have to deposit the tax. You carry over the undeposited tax to the next quarter and add it to that quarter's FUTA tax to determine if the $500 amount has been exceeded.
FUTA stands for Federal Unemployment Tax Act. It is an employer-paid tax. Employees do not pay this tax. Therefore, you do not withhold FUTA tax from an employee's pay.
If in any quarter during the calendar year, your FUTA tax has accumulated to more than $500, you are required to make a tax deposit. However, if your accumulated FUTA tax liability for all four quarters of the calendar year totals $500 or less, you may pay the tax with Form 940.
The following types of payments are exempt from FUTA tax:
1. Fringe benefits, such as:
- Meals and lodging
- Contributions to accident or health insurance plans for employees, including certain employer payments to a Health Savings Account or an Archer MSA.
- Payment for benefits excluded under section 125 (cafeteria plans).
- A Cafeteria Plan is a plan that offers flexible benefits under IRC section 125. Employees choose their benefits from a menu of cash and benefits, some of which can be paid for with pretax deductions from wages.
- Employer reimbursements for qualified moving expenses, to the extent that these expenses would otherwise be deductible by the employee.
Form 945 is used to report federal income taxes withheld from certain types of non-employee distributions, such as pensions, annuities, IRAs, and gambling winnings.
Even if you have only one employee, you must comply with federal and state annual and quarterly employment tax reporting and deposit requirements.
Form W-2, Wage and Tax Statement:
Form W-2 is issued annually to each employee to report wages, tips and other compensation, as well as federal income withheld, social security and Medicare tax withheld. State and local, if applicable, are also reported on Form W-2 as well as other information employment-related information.
Do You Have a Household Employee?
You have a household employee if you hired someone to do household work and that worker can be classified as your employee.
If a worker is classified as your employee and you pay the annual wage threshold ($1,900 for 2015) or exceed it, you and your employee must pay FICA taxes (Social Security and Medicare taxes).
If taxes are not deposited timely or in the correct amount, the IRS will impose a deposit penalty.
Penalties are generally based on a percentage of the unpaid tax liability.
Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability.
Trust fund taxes are taxes an employer is required to withhold from an employee's pay and turn over to the U.S. Treasury.
Trust fund taxes include:
In a cash crunch? Tempted to put off paying employment taxes? Don't! The IRS views late payment of employment taxes as a serious matter and the penalties reflect this.
If you're a do-it-yourselfer and have employees, you may be tempted to tackle the job of preparing the payroll. You may find this to be a daunting experience, best left to professionals.