Payroll taxes can be daunting for employers to calculate and pay. With the numerous tax laws, regulations and compliance requirements, employers are required to be up-to-date on the latest regulations to ensure they’re making accurate and timely payroll tax payments. The only thing that a business owner wants is to nail the tax season. To do that, employers need to be aware of the process and their responsibilities from understanding how to calculate payroll taxes to filing the appropriate paperwork.
The calculation of payroll taxes can be complicated and time-consuming even with a calculator, so it’s important to have a good understanding of how to get your payroll taxes right.
So how to calculate payroll tax? What has to be included? This article will help outline the basics of payroll taxes every small business owner needs to know about.
- Federal Insurance Contributions Act (FICA)
- Federal Unemployment Taxes (FUTA)
- State Unemployment Taxes (SUTA)
- Income taxes
- Voluntary payroll deductions
What is a payroll tax?
A payroll tax is an amount of money that an employer is responsible for withholding from their employees’ wages, and then paying to a governmental agency. It’s a type of tax that’s used to fund various social programs, such as Social Security and Medicare. Payroll taxes are generally calculated as a percentage of an employee’s gross wages and are paid to the government on a regular basis, such as quarterly or annually.
The amount of payroll taxes that are due will depend on the tax rate that applies to the employee’s wages, as well as any exemptions or deductions that the employee may be eligible for. The rate is usually determined by the IRS and can vary from state to state.
From their side, the employer is responsible for:
- Paying their share of payroll taxes;
- Depositing tax dollars withheld from the employees’ paychecks;
- Preparing reconciliation reports;
- Accounting for the payroll expense;
- Filing payroll tax returns.
How to calculate payroll taxes
The fullest pack of payroll taxes in the United States normally includes:
- Federal Insurance Contributions Act (FICA)
- Social Security;
- Medicare taxes;
- Federal Unemployment Taxes (FUTA);
- State Unemployment Taxes (SUTA);
- Income tax (federal/state).
Note: The rate of unemployment insurance the employer will pay varies by industry, state, and federal fees. Keep in mind that it’s better to turn to a professional CPA for tax advice if you want to be certain that everything is fine.
Federal Insurance Contributions Act (FICA)
FICA is used to fund Social Security and Medicare, two of the most important safety net programs in the United States. This tax is shared by both employers and employees. Employers are required to withhold a certain percentage of each payroll check that they issue, as well as pay a matching amount.
FICA also applies to self-employed individuals. The self-employment tax rate is 15.3%. The rate is made up of two percentages: 12.4% for Social Security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
- 6.2% Social Security tax on the first $160,200 of employee wages (maximum tax is $9,932.40; i.e., 6.20% × $160,200);
- 1.45% Medicare tax on the first $200,000 of employee wages;
- 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all employee wages in excess of $200,000.
Federal Unemployment Taxes (FUTA)
FUTA is a type of payroll tax that is paid by employers and is used to fund state unemployment benefits for those who become unemployed due to no fault of their own. It’s a tax imposed by the federal government, and it’s typically paid by the employer each quarter.
The FUTA tax rate is 6.0%. The tax applies to the first $7,000 you paid to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different based on the respective state’s rules (filled in Form 940).
State Unemployment Taxes (SUTA)
Similar to the FUTA, State Unemployment Taxes (SUTA) is a payroll tax which is imposed on employers in order to finance state unemployment compensation programs. It’s used to pay unemployment benefits to individuals who have been laid off from their job due to no fault of their own. SUTA taxes are paid by employers and their rate varies from state to state depending on the number of employees a business has and the amount of wages paid to employees.
In most states, employers are required to pay SUTA taxes quarterly or annually. Since different jurisdictions have unique requirements for payroll taxes, it’s better to double check everything with a tax professional.
Income tax is calculated based on the taxable income of an individual or organization. It’s a progressive tax, meaning that those who earn more are taxed at higher rates.
Federal Income Tax
Federal Income Tax is an employer’s tax and is withheld by employers on behalf of employees. They’re paid quarterly to the federal government. The amount of Federal Income Tax depends on a number of factors and is determined according to the information provided on the employee W-4 form.
State Income Tax
State income taxes are a major source of revenue for state governments, with most states collecting them to fund public services such as education, public safety, and healthcare. The amount of taxes collected from individuals and businesses within a state depends on the specific state tax laws. For example, some states have a flat tax rate for all residents, while others may have progressive tax rates based on income levels.
States that don’t have income taxes:
- New Hampshire;
- South Dakota;
To learn more about income taxes check our blog → Click here.
Voluntary payroll deductions
Voluntary payroll deductions are an increasingly popular way for companies to provide employees with the opportunity to save for their future. Through voluntary payroll deduction, employees are able to set aside a portion of their wages each pay period in order to save for retirement or other expenses.
The process for setting up voluntary payroll deductions is relatively simple. Employees choose the amount they’d like to set aside each pay period. The employer then deducts the amount from the employee’s wages and deposits it in the designated account. This amount is then subtracted from the employee’s taxable wages, resulting in a reduction in the employee’s payroll tax.
Voluntary payroll deductions can include:
- Health insurance premiums, such as medical, dental, and eye care;
- Life insurance premiums;
- Retirement plan contributions;
- Employee stock purchase plans, such as ESPP and ESOP plans;
- Meals, uniforms, union dues, and other job-related expenses.
To be certain about each payroll deduction, consult a professional.
Payroll tax process steps
Now, when we’ve described all the components and shown the main rates, let’s go through the main steps of payroll tax filing.
Keep in mind that when dealing with payroll taxes (or any taxes) it’s better to seek expert advice from a tax professional who can advise on your own specific circumstances. The requirements and conditions might be different for each jurisdiction.
#1. Calculate the gross pay
The first step in the payroll tax process is to determine the employee’s gross pay. This includes all wages, salaries, commissions, bonuses, and other forms of remuneration. This calculation will determine the amount of taxes that are due from the employee.
Gross pay = Employee’s hourly rate × Hours worked
#2. Deduct income tax and the amount for FICA
After the gross pay is calculated, the employer must then deduct any applicable taxes from the employee’s wages based on the W-4 form the employee has completed. This includes state and federal income taxes, Social Security and Medicare taxes, and any other applicable taxes. If you’re hiring employees, you can use an online W-2 to calculate these taxes.
Note: The IRS provides an Income Tax Withholding Assistant to help determine how much tax you need to withhold and report as an employer.
Aside from the employees’ amount for FICA taxes, you, as a business owner, have to calculate the amount you need to pay from your side and set aside those amounts.
#3. Make payments to the IRS
You’re obligated to make payments to the IRS either monthly or semi-weekly, based on the total size of your employee payroll. The employer must ensure that all taxes are paid in full and on time in order to avoid any potential penalties or interest.
You can pay the taxes online using the Electronic Federal Tax Payment System (EFTPS). State payroll taxes, when applicable, are usually submitted via the state’s own electronic or manual systems.
#4. Report payroll taxes
Employers must then report payroll taxes to the proper taxing authorities. This includes filing an Employer’s Quarterly Federal Tax Return (Form 941) to the IRS, reporting the employee wages to the Social Security Administration (Form W-2, Form W-3), and submitting state income tax withholding to the state’s taxing authority.
Payroll tax reporting can be done manually, with the help of HR payroll software or with the help of an accountant.
Note: You can report payroll taxes through E-file.
Overall, the payroll tax process is an important part of any business and employers need to ensure that they’re accurately and promptly reporting and paying payroll taxes. Failing to comply with payroll tax requirements can result in fines and penalties (we’ll talk about them a bit later), so businesses must understand their payroll tax obligations and take the necessary steps to ensure compliance.
2023 payroll taxes due dates for an employer
Even though it’s already February and the first month of 2023 is over, we’ll provide you with a full calendar of the important dates for payroll tax filing. Since they mostly stay the same, it’ll help you to be prepared for the next round of payroll tax filing in 2024.
|January 17||– monthly payroll tax payments: deposit for December (they’re paid either monthly or semi-weekly: all new employers start out as monthly depositors)|
|January 31||– Employer’s Quarterly Tax Return (Form 941)|
– Employer’s Annual Federal Unemployment Tax Return (Form 940)
– Annual wage reporting for employees (Form W-2 and W-3)
|February 15||– monthly payroll tax payments: deposit for January|
|March 15||– monthly payroll tax payments: deposit for February|
|April 18||– monthly payroll tax payments: deposit for March|
|May 1||– Quarterly Federal Tax (Form 941)|
– Quarterly FUTA tax deposits (may be due for the first quarter ending March 31, 2023)
|May 15||– monthly payroll tax payments: deposit for April|
|June 15||– monthly payroll tax payments: deposit for May|
|July 17||– monthly payroll tax payments: deposit for June|
|July 31||– Quarterly Federal Tax (Form 941)|
– Quarterly FUTA tax deposits (may be due for the first quarter ending June 30, 2023)
|August 15||– monthly payroll tax payments: deposit for July|
|September 15||– monthly payroll tax payments: deposit for August|
|October 16||– monthly payroll tax payments: deposit for September|
|October 31||– Quarterly Federal Tax (Form 941)|
– Quarterly FUTA tax deposits (may be due for the first quarter ending September 30, 2023)
|November 15||– monthly payroll tax payments: deposit for October|
|December 15||– monthly payroll tax payments: deposit for November|
Keep in mind that missing the due date means you’ll need to pay a penalty, in which case you’ll receive a notice from the IRS. Generally, payroll tax penalties are:
- 1 to 5 days: 2% of unpaid amount;
- 6 to 15 days: 5% of unpaid amount;
- More than 15 days: 10% of unpaid amount;
- More than 10 days after your first notice: 15% of unpaid amount.
Interested in Taxes? Learn more about Tax Revenue for your Business.
Payroll taxes are a huge part of running a successful business. Knowing when, where and how to pay these taxes is important for businesses of all sizes.
Payroll taxes are often complicated and confusing, so businesses need to understand the rules and regulations. Knowing the tax rate, filing deadlines, and withholding requirements are just a few of the important things to know about payroll taxes. By familiarizing yourself with the basics of payroll taxes, employers can ensure that they are compliant and avoid costly mistakes.
This article serves as a brief overview of the existing payroll taxes to assist small businesses who are looking to learn more about the payroll tax. It doesn’t intend to provide full information on the legal questions related to payroll tax. If you have additional questions, please consult a tax or legal professional in your area.