You’ve taken the time to write a business plan, streamline day-to-day operations, and staff your business with the right people. However, one of the tasks that can make or break a successful employer is payroll. It’s critical to understand how payroll taxes work and comply with regulations.
Whether you choose to file payroll taxes yourself or use one of the best payroll companies, we’ve got you covered. This quick reference guide provides a thorough overview of how to complete payroll taxes accurately and on time.
Payroll taxes are the taxes paid on the hourly wages and salaries of your employees. Additionally, these taxes fund Social Security and Medicare. According to the Organisation for Economic Co-operation and Development, individual income taxes – federal, state and local – made up over 40% of the U.S. total tax revenue in 2018, with social insurance taxes at 23%.
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As a significant source of government revenue, half of payroll taxes are paid by employers (7.65%), and the other 7.65% is directly debited from employee paychecks. While the employer and employee share payroll taxes, most of the cost is passed on to the employee.
You are liable for these mandatory and tax responsibilities for your company:
Here are some of the voluntary tax responsibilities you can opt for:
These are the four main payroll tax categories:
Consider these aspects of your business when calculating payroll taxes:
We describe the main payroll tax types in more detail below.
FICA is the combined federal payroll tax that includes Social Security and Medicare. You will pay the same combined rate as your workers: 7.65%. The following is a breakdown of the FICA taxes for Social Security and Medicare.
You pay a 6.2% tax rate for each employee for your company toward Social Security, while each staff member also pays 6.2% for Social Security. The 6.2% rate is based on the employee’s gross taxable wages. Once your associate reaches $142,800 in gross taxable wages, you no longer have to withhold Social Security taxes or contribute Social Security taxes for that employee. However, the $142,800 wage base is for 2021, and may change in the future.
You are obligated to pay a 1.45% tax rate for each employee for Medicare, while your worker also pays 1.45%. This rate is based on the employee’s gross taxable wages.
There is no wage base for Medicare tax. Consequently, once an employee reaches a certain wage threshold, they are required to pay an additional 0.9% in Medicare taxes based on their filing status. The 2021 thresholds are $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately).
Regardless of the employee’s gross taxable wages, you are not required to pay an additional Medicare tax – just the base 1.45%.
When you are self-employed, you’re considered both an employer and an employee. Consequently, you are required to pay both parts of FICA – 15.3% – toward Social Security and Medicare. This combined tax is also known as the Self-Employment Contributions Act (SECA) tax.
Of the total 15.3% in SECA taxes, 12.4% goes to Social Security and 2.9% is paid to Medicare. Filing as self-employed, you will need to pay Social Security tax until you earn $142,800 annually. After meeting that threshold, you no longer owe money in Social Security taxes.
You are also subject to the same rules as FICA regarding Medicare taxes. Once you reach the wage threshold of $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately), you are required to pay an additional 0.9% in Medicare taxes.
Filing Schedule SE (Form 1040) can help you estimate self-employment taxes.
While the FUTA tax is the same for all employers at 6%, the SUTA (State Unemployment Tax Act) tax varies from state to state. States can charge fees for administrative costs and job training. You’ll receive a percentage range based on your employment history, and how often your workers collect unemployment.
You can pay FUTA taxes electronically using EFTPS (Form 940). While most employers pay FUTA taxes quarterly, if you owe less than $100, you can wait until you owe at least $100 to make a payment.
You are responsible for reporting and depositing income tax and FICA for your company. However, you can choose between two deposit schedules: monthly and semiweekly. All new businesses begin as monthly depositors, but it is important to check every year to see if your status has changed.
Before each calendar year, you must review IRS Publication 15 (Form 941, 944 and 945) or Publication 51 (Form 943) to determine which deposit schedule your business requires. Late deposits can result in a penalty of up to 15%. FUTA tax (Form 940) deposits are required quarterly for tax amounts over $500. You must deposit the FUTA tax by the end of the month directly after the quarter ends.
It’s important to familiarize yourself with the funds transfer system – the Electronic Federal Tax Payment System (EFTPS) – for all federal tax deposits.
Here are the forms you need to file for federal income tax and FICA:
You will need to file these forms regarding wages and W-2 forms:
Self-employed individuals who own a business file taxes as a sole proprietor or independent contractor. You may also fall under the self-employed umbrella if you are a member of a partnership that owns a trade or company, or if you’re in business for yourself – part time or full time.
Self-employed individuals pay an income tax and a self-employment tax (SE tax) that covers their Social Security and Medicare tax contributions. You can determine if you are subject to self-employment and income taxes whether your business made a profit or loss. To calculate your business profit or net loss, subtract your business expenses from your business income. Then, report your findings on Form 1040 or 1040-SR.
Here are the forms you’ll need if you’re self-employed:
There are specific self-employed tax considerations. If your self-employment net earnings are $400 or more, you will need to file an income tax return. If your earnings were less than $400, you still might have to file because of additional filing requirements listed on Form 1040 and 1040-SR.
When you file your FUTA return, you’ll need Form 940.
If your small business is incorporated but doesn’t have any employees, you are required to pay federal, state, local, and FICA taxes because you are the sole employee of your company.
However, you are considered self-employed if you do not have any staff and are not incorporated, and thus are required to report and pay taxes on your income quarterly.
January is the busiest month for payroll taxes. Consider scheduling some time before the end of the year to gather and complete all of the required forms. Even if you use an accountant to complete payroll taxes, you must ensure they have all the necessary information to meet the required deadlines.
Here are the payroll tax deadlines for the calendar year: