PAYROLL TAXES BROKEN DOWN
If you have been an employee, you probably paid close attention to the amount of money taken out of your pay. However, you may not have paid attention to where all of the money was going (or where it ended up).
Income tax is the one everyone is familiar with and depending on where you live you will have both federal and state income tax withheld. You may also see local income tax being withheld from your paycheck. But, when we are talking about payroll taxes we are talking about more than just the income tax. There are specific taxes, some which you may be familiar with, that are withheld from the employee's paycheck and are also paid by the employer.
So, let's go over what the employee will typically see withheld from their paycheck.
Federal income tax
Federal Insurance Contributions Act ("FICA") (7.65%)
Old Age, Survivors, and Disability Insurance ("OASDI" or Social Security)
State income tax (if applicable)
State disability insurance
Certain local taxes such as school district taxes, city tax, and county tax.
In addition to these taxes being withheld, there are of course the voluntary deductions the employee may have withheld.
These consist of:
Health and life insurance premiums
Retirement plan contributions
Certain job-related expenses such as meals, uniforms, union dues, etc.
Employee stock purchase plans
Note: Some voluntary deductions are pre-tax deductions and others are after-tax deductions. Depending on whether the deduction is pre-tax or after-tax could effect how much federal income tax you end up paying.
EMPLOYER AND EMPLOYEE PAYROLL TAX RESPONSIBILITIES
As mentioned above, there are certain parts of the payroll taxes that both the employer and employee are responsible for paying. Fortunately for the employee, their shared payment responsibility of the payroll taxes is actually withheld from their paycheck and held in trust by the employer. The employer then remits this money to the IRS and other taxing authorities on behalf of the employee.
So, let's start with what payroll taxes the employee is responsible for paying.
Federal and state income tax
Note: The employee is also responsible for half of the FICA tax (7.65%).
Federal Unemployment Tax (FUTA)
State Unemployment Tax (SUTA)
Note: The employer is responsible for the other half of the FICA tax (7.65%).
FICA Taxes Are Shared 50/50
The FICA taxes are a shared responsibility between the employer and employee. To better understand this, we will need to take a look at the breakdown of the FICA taxes and the percentages that are associated.
So, in total the FICA tax is 15.3% of the employee's gross pay. This does not mean the employee is paying 15.3% FICA tax on their income. Instead, half of this 15.3% is actually paid by the employer, leaving the remaining amount to be withheld from the employee's pay. Let's take a deeper dive into how FICA tax is broken down.
Employee A receives a paycheck for a 2 week pay period that shows their gross earnings were $2,000. The total combined FICA tax due would be $306 ($2,000 x 15.3% = $306). Half of this ($153) would be paid by the employer and the other half would be withheld from the employee's paycheck by the employer and then paid to the IRS.
This can be broken down even further to see what amounts are associated with the FICA tax.
The 15.3% is broken out into two parts:
12.4% Social Security (6.2% employee responsibility, 6.2% employer responsibility)
2.9% Medicare (1.45% employee responsibility, 1.45% employer responsibility)
So, let's take another look at the above example.
Employee A receives a paycheck for a 2 week pay period that shows their gross earning at $2,000. Now, we know the total FICA tax amounts to $306 but, let's look at how this is broken down. Because the Social Security portion of FICA is 12.4% of the employee's gross pay, that would mean the total Social Security required to be paid would be $248 ($124 paid by the employer and $124 withheld from the employee's pay by the employer and paid to the IRS). The other half of FICA is Medicare tax, which is 2.9% of the employee's gross pay, equating to $58 ($29 paid by the employer and $29 withheld from the employee's pay by the employer and paid to the IRS).
RESPONSIBILITIES OF THE EMPLOYER BEYOND WITHHOLDING TAX
Withholding the employee's share of the payroll tax is only one small part to the responsibilities an employer has concerning payroll taxes. There are plenty of other things that need to be done in order to avoid a payroll tax issue and potentially trust fund recovery penalties from being assessed.
Making sure the taxes withheld from the employee's pay are properly deposited and then paid over to the IRS, state, or local taxing authority
Filing the quarterly payroll tax returns on time
Accounting for the payroll expenses
Preparing certain reconciliation reports
The different returns the employer is responsible for filing to report the payroll taxes are:
Form 941, quarterly payroll tax return
Form 940, the federal unemployment tax return
Form 943, the federal return for agricultural employees
Form 944, the employer's annual federal tax return
Form 945, annual return of withheld federal income tax
Form W-2, wage and tax statement
Payroll taxes are one of the most important aspects to having employees. Making sure you are withholding the correct amount from your employee's pay and paying the payroll taxes on time will save you the headache of having to speak with the IRS later. If you don't feel comfortable with handling the payroll taxes on your own or even if you do, it's probably advisable to find someone who specializes in payroll taxes to do it for you. By doing this you are making sure the payroll taxes are being properly taken care of and you are freeing yourself up to focus on running and growing your business.
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