When you have employees at your business, you must handle employment taxes. Employment taxes consist of unemployment, income, and payroll taxes. Familiarizing yourself with payroll taxes is an important part of being an employer. Check out this payroll tax guide to better understand payroll basics and your responsibilities as an employer.
Employment taxes: Income and unemployment taxes
Before you can give your employees their paychecks, you must withhold income and payroll taxes. There are federal income taxes, and some areas have state and local income taxes as well.
As an employer, you also need to pay federal and state unemployment taxes (FUTA and SUTA). Generally, you do not withhold unemployment taxes from employee wages.
Payroll taxes are not the same as income and unemployment taxes. However, all three are employment taxes. For the purpose of this article, we will only discuss payroll taxes.
What are payroll taxes?
Payroll taxes are in a league of their own. Unlike income and unemployment taxes, payroll taxes go toward Social Security and Medicare. Together, Social Security and Medicare make up Federal Insurance Contributions Act (FICA) tax.
FICA tax is an employer and employee tax, meaning you both contribute.
FICA tax is a flat rate that goes toward Social Security and Medicare taxes. You must match the amount you withhold from each employee’s wages.
Withhold and contribute 7.65% of each employee’s wages for FICA tax. The tax rate is further broken down between Social Security and Medicare. For each tax rate, there are special rules you need to follow.
Social Security tax rate
The Social Security tax rate is 6.2%, meaning you will withhold this amount from each employee’s wages and contribute the matching employer portion to remit to the IRS.
For example, you have an employee who earns $600 per week. You must withhold $37.20 (600 X .062) for Social Security tax and pay an additional $37.20.
You will continue withholding and contributing to the Social Security tax until your employee earns above the Social Security wage base. For 2017, the wage base is $127,200. After the employee earns $127,200 in gross wages, you do not withhold or contribute Social Security tax.
Medicare tax rate
The Medicare tax rate is 1.45%. That means you withhold 1.45% of each employee’s wages and contribute a matching amount.
Let’s use the same example and say your employee earns $600 per week. You must withhold $8.70 (600 X .0145) and contribute $8.70.
Medicare tax does not have a wage base limit. In fact, there is an additional Medicare tax of 0.9% after an employee earns above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately) during the year.
You do not pay the additional Medicare tax rate. After the employee earns above the additional Medicare tax threshold, you will withhold 2.35% from their wages. But, you will only contribute 1.45%.
Depositing and reporting payroll tax
After you withhold payroll tax from employee wages and determine your contributions, what do you do with the money?
Depositing FICA tax
You are responsible for depositing FICA tax. Do this by following a monthly or semiweekly depositing schedule.
Your schedule depends on the tax liability you reported on Form 941 during a four quarter lookback period. If you reported $50,000 or less in taxes, you must make monthly deposits. If you reported more than $50,000, you must deposit FICA tax semiweekly.
Deposit monthly FICA tax amounts on the 15th day of the month after you withhold them. For semiweekly depositors, it depends on payday. If you pay employees on Wednesday, Thursday, or Friday, deposit taxes by the following Wednesday. If you pay employees on Saturday, Sunday, Monday, or Tuesday, you must deposit taxes by the following Friday.
Reporting FICA tax
The IRS requires you to file payroll forms. Unless the IRS tells you to file Form 944, you must report the amount of FICA tax on Form 941, Employer’s Quarterly Federal Tax Return, each quarter. You will include information like the compensation you paid employees and the taxes you withheld.
The Form 941 due dates are April 30, July 31, October 31, and January 31.
As a business owner, you should also be familiar with self-employment tax, or the Self-Employment Contributions Act (SECA) tax. SECA tax works similarly to payroll taxes.
Like payroll taxes, self-employment tax goes toward Social Security and Medicare taxes. When you are self-employed, nobody withholds Social Security and Medicare taxes from your paychecks. And, nobody is making a matching contribution on your behalf. If you do not receive regular wages from your business, you are required to pay self-employment tax on your business’s net profit.
For 2017, the SECA tax rate is 15.3%. Social Security takes up 12.4% of this, and Medicare takes up 2.9%.
Like FICA tax, you won’t pay the Social Security tax portion of SECA after you earn $127,200. There is an additional Medicare tax of 0.9% after you earn above $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately). You will pay a total of 3.8% toward Medicare tax after reaching this threshold.
To calculate your self-employment tax, use Schedule SE.
The importance of payroll taxes
You must withhold, contribute, and deposit payroll taxes in order to stay compliant with the IRS. Managing payroll taxes is a mandatory part of being an employer. If you don’t properly withhold Social Security and Medicare taxes, you could face penalties. If you’re not confident in your ability to accurately calculate and file payroll taxes, consider using payroll services.
What do payroll taxes go toward? Social Security tax provides aid to retirees, the disabled, and survivors of a worker who has died. Medicare tax goes to qualifying individuals to pay for healthcare and hospital insurance.
Understanding payroll taxes and your employer responsibilities is a great start to legally running payroll.
Guest Author Bio: Rachel Blakely is a content writer at Patriot Software, LLC, a provider of affordable payroll and accounting software for small businesses. At Patriot, Rachel provides accounting, payroll, and small business tips in her writings.