As an employer, you are required by law to withhold money from employees’ pay and remit the amounts to various agencies. In addition, you have direct liability for certain taxes based on workers’ wages.
The taxes that you’re required to withhold on behalf of workers and those that you must pay directly comprise your payroll taxes. Statutory payroll taxes include federal, state and local income taxes, Social Security and Medicare taxes, federal and state unemployment taxes, and, in some states, disability insurance taxes.
Generally speaking, an employee’s gross pay (pay rate times number of hours worked) minus all statutory payroll tax deductions minus voluntary payroll deductions equals net pay. Statutory payroll tax deductions include the following:
• Federal income tax withholding (based on withholding tables in Publication 15)
• Social Security tax withholding (6.2% up to the annual maximum)
• Medicare tax withholding (1.45%)
• State income tax withholding
• Various local tax withholdings such as city, count, or school district taxes; state disability; or unemployment insurance
If an employee chooses to participate in certain benefit programs, belong to a professional organization or make designated charitable contributions, these voluntary payroll deductions may also be withheld. Voluntary payroll deductions can include such things as health and life insurance premiums and retirement plan contributions. Voluntary deductions may be paid with pretax dollars or after-tax dollars, depending on the type of designation.
Your responsibility for payroll taxes continues even after paychecks have been issued to employees since you must pay the employer’s share of payroll taxes, deposit the money that has been withheld from workers’ paychecks, prepare various reconciliation reports, account for the payroll expense through financial reporting and file payroll tax returns.
An employer’s portion of payroll taxes is an added expense over and above the expense of an employee’s gross pay. The employer portion of payroll taxes includes the following:
- Social Security taxes (6.2% up to the annual maximum)
- Medicare taxes (1.45% of wages)
- Federal unemployment taxes
- State unemployment taxes
The Federal Insurance Contributions Act (FICA) tax consists of Social Security and Medicare taxes, which are split 50/50 between the employer and employee. Together the two halves of the FICA taxes add up to 15.3%. The 15.3% FICA tax is broken down as follows:
- Social Security (employee pays 6.2% and employer pays 6.2%)
- Medicare (employee pays 1.45% and employer pays 1.45%)
Employers are required to report their payroll tax obligations and to deposit payroll taxes in a timely manner. The key to controlling your payroll tax obligations is making all payments on time, so you avoid getting hit with costly fines and penalties.