Payroll taxes are paid by employees and your company as part of the payroll process. You withhold these taxes from employee paychecks and remit them to the appropriate state and federal agencies. Since payroll tax errors can result in employee & employer over- or underpayment, IRS penalties, or other issues, you need to pay close attention when calculating, withholding, paying, and reporting payroll taxes or make sure you have a process or partner to take care of these items, like Madison Resources
Here are some basics you need to know about payroll taxes when launching your staffing company.
Payroll Tax Process
Federal Payroll taxes
To process payroll taxes, calculate the gross pay for each employee, then deduct a specific amount for federal income tax. Use each employee’s Form W-4 to determine how much to deduct for Federal Insurance Contributions Act (FICA) taxes to fund Social Security and Medicare. The employee tax rate for Social Security is 6.2%. This portion is capped each year at a maximum wage. For 2020, that amount is $137,700. If an employee earns more than that, the excess amount is not taxable for Social Security. Along with the employer tax rate of 6.2%, the total amount of Social Security tax due is 12.4% per employee. The employee tax rate for Medicare is 1.45%. There’s an additional Medicare tax of 0.9% imposed on employees earning above $200,000 a year. Along with the employer tax rate of 1.45%, the total Medicare tax due is 2.9% per employee.
State Payroll Taxes
You must withhold state payroll taxes for states that impose payroll taxes. Individual states may require you to withhold additional payroll taxes for state unemployment funds, state disability funds, or state workers’ compensation funds. Keep in mind that state payroll taxes apply to your business, depending on where your employees work.
Local municipalities often have their own rules, taxes, and items you need to be aware of. It is best to call the local government office for details on local rules.
Steps to Pay Payroll Taxes
There are multiple steps to pay payroll taxes. First, calculate the amounts for federal income tax withholding and withhold the amounts from employee paychecks. Then, calculate the employer amounts owed for federal income tax and set them aside. Next, calculate gross monthly wage earnings and payroll deductions to determine net pay. The basic formula for net pay is the employee’s gross pay (pay rate x hours worked), minus statutory payroll tax deductions, minus voluntary payroll deductions like insurance premiums, retirement plan contributions, or stock purchases. After that, depending on the size of your total employee payroll, make payments to the IRS monthly or semi-weekly. Report payroll taxes quarterly using Form 941. Be sure you withhold, report, and pay payroll taxes on time and maintain required payroll records to avoid penalties.
Payroll Tax Record Keeping
The Fair Labor Standards Act (FLSA) requires you to maintain payroll records. Requirements differ for exempt and nonexempt employees. Documents include employment contracts, time cards, and records showing deductions from and additions to wages. States may have specific record-keeping requirements as well.
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