Payroll Taxes: The Complete Guide for Employers

ayroll taxes are the taxes employers withhold from an employee's salary and then pay directly to the government. These include federal, state, and local income taxes, Social Security and Medicare taxes, and state and federal unemployment taxes.

As the owner of a business, you need to understand how payroll taxes work to stay compliant with the law and conduct accurate financial planning.

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What are payroll taxes?

Payroll taxes are an important component of your company's employment costs, especially because they impact the net income of your employees. There are several different types of payroll taxes that you should be aware of:

• Federal income tax
• Social Security tax
• Medicare tax
• Federal unemployment tax (FUTA)
• State and local taxes
• State unemployment tax (SUTA)

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How do payroll taxes work?

Handling payroll taxes involves several steps, including calculating your taxes, withholding them from employee paychecks, and paying them to the relevant government entities. Here’s an overview of the process.

Calculation of payroll taxes

You'll need to calculate each type of payroll tax differently. For federal income tax, the amount is determined by each employee's taxable income, filing status, and the details on their Form W-4, which they fill out when they're hired. Social Security and Medicare taxes are straightforward calculations based on gross wages. FUTA and SUTA are also calculated as a percentage of employee wages.

Withholding payroll taxes from employee paychecks

Once you've figured out your payroll taxes, you’ll deduct them from the employee's paycheck each pay period before distributing payroll checks or deposits. In addition to federal income tax, Social Security tax, and Medicare tax, you’ll need to withhold state and local income taxes if they are applicable at the employee's location. As an employer, you’re responsible for paying FUTA and SUTA, which you won't withhold from employee paychecks.

Payment of payroll taxes

After you withhold payroll taxes, you have to pay the appropriate government authorities. Typically, you'll pay federal income tax, Social Security, and Medicare taxes either monthly or semi-weekly, depending on the size of your payroll. You'll pay FUTA taxes quarterly if you owe over $500. State and local tax payment due dates vary by location.

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Federal payroll tax

Federal payroll taxes are taxes that you're required to withhold from employees' wages or salaries and pay directly to the federal government.

Explanation of federal payroll tax

Here's a detailed look at each component of federal payroll taxes:

• Federal Income tax: This is the tax imposed by the federal government on employees' earnings.
• Social Security tax: This tax funds the Social Security program, which provides benefits for retired workers, disabled individuals, and their dependents.
• Medicare tax: This tax funds the Medicare program, which provides healthcare to individuals who are 65 or older or have certain disabilities.
• Federal Unemployment tax: This tax is paid solely by the employer and funds unemployment benefits at the federal level.

Calculating federal payroll taxes

For federal income tax, you’ll calculate the amount based on the employee's taxable income, filing status, and the details on their Form W-4. The IRS provides tax withholding tables in the Employer's Tax Guide that you’ll use to calculate the exact amount to withhold.

Social Security tax is 6.2% of an employee's gross wages up to an annual wage base limit. The Medicare tax is 1.45% of all wages with no limit, and there's an additional 0.9% tax on wages above $200,000. FUTA is calculated as a percentage of the first $7,000 of an employee's wages per year.

Reporting and paying federal payroll taxes

After calculating and withholding the appropriate amounts, you’ll then report and pay these taxes to the IRS. You'll report federal taxes quarterly using IRS Form 941, the Employer's Quarterly Federal Tax Return, or annually using Form 944 for smaller businesses. FUTA taxes are reported annually using Form 940.

You can pay federal taxes to the IRS through the Electronic Federal Tax Payment System (EFTPS). You need to provide each employee with a W-2 form at the end of the year that reports the total amount of wages paid and taxes withheld.

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State payroll tax

Not all states have income taxes, and the ones that do have varying rates and rules, but in general, states use these taxes to fund state services and programs.

Explanation of state payroll tax

State payroll taxes typically refer to state income taxes, although some states also have unemployment insurance taxes and other specific payroll-related taxes.

Calculation of state payroll tax

The calculation of state payroll taxes varies by state. For states with income tax, the tax rate usually depends on the employee's income level and filing status, similar to federal income tax. Some states use a flat tax rate, meaning all income is taxed at the same rate, regardless of the amount. Others use a progressive tax system with multiple tax brackets, like the federal system.

Reporting and payment of state payroll tax

Reporting and payment of state payroll taxes also vary by state. Most states require employers to report payroll taxes on a quarterly basis, but the specific forms and procedures can differ. Depending on the state, employers may be required to file electronically or by mail.

The payment frequency of state payroll taxes can be monthly, quarterly, or annually, depending on the size of the employer's payroll and the specific rules of the state. Some states require more frequent payments for larger employers.

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Local payroll tax

Local payroll taxes are taxes that you must withhold from employees' wages or salaries. You'll pay them directly to local entities such as cities, counties, or school districts. These taxes are generally used to fund local services and infrastructure.

Explanation of local payroll tax

Local payroll taxes, where they exist, can take various forms. Some localities tax only residents, others tax only non-residents, and some tax both. The specific rules and rates depend on the regulations set by the local government entity.

Calculation of local payroll tax

The calculation of local payroll taxes, like state taxes, can vary greatly depending on the locale. Some localities use a flat rate, while others use a percentage of wages.

Reporting and payment of local payroll tax

Reporting and payment procedures for local payroll taxes vary by locality. Some localities require employers to remit the taxes withheld directly to them, while others have the state collect the taxes on their behalf. The frequency of these payments can also vary, but they are often due quarterly or monthly.

You may need to file local payroll tax returns separately from state and federal taxes. The specific forms and procedures for this depend on the requirements of your local tax authority.

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Employer payroll tax

Employer payroll taxes are taxes that you pay on behalf of your employees. These taxes are an additional cost of having employees and are separate from the employee's gross wages or salaries.

Explanation of employer payroll tax

As with taxes you withhold, payroll taxes fund government programs and services, including Social Security, Medicare, and some states' unemployment insurance programs.

Calculation of employer payroll tax

As the employer, you are responsible for paying some taxes in addition to the taxes you withhold from your employees' pay, including:

• Social Security Tax: 6.2% of each employee’s gross wages up to the wage base limit ($160,200 in 2023)
• Medicare Tax: 1.45% of all gross wages
• FUTA Tax: 6% on the first $7000 of each employee’s wages
• SUTA: Varies based on the state

Reporting and payment of employer payroll tax

For federal payroll taxes, you’ll need to file Form 941, the Employer's Quarterly Federal Tax Return, or Form 944 for smaller businesses. These forms report your total liability for Social Security, Medicare, and withheld federal income tax.

For state unemployment taxes, you’ll need to report and pay these taxes to the appropriate state agency. The reporting and payment procedures vary by state.

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Employment taxes

Employment taxes encompass all employee-related taxes, including ones that only the employer is responsible for. These include federal income tax, FICA taxes, and FUTA taxes.

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How to pay payroll taxes

The easiest and most common method for paying federal taxes is through the IRS’s EFTPS. Some small businesses may be eligible to pay federal payroll taxes using a check or money order. However, this method is generally less convenient and less secure than electronic payment.

Many states and local jurisdictions also have electronic tax payment systems. The specific methods available will vary by state and locality. Check with your state department of revenue and your city tax office for detailed instructions. If you use a payroll provider, most will handle all of your tax payments for you.

Frequency of payroll tax payments

The frequency of payroll tax payments depends on the size of your payroll and the specific tax involved, but are usually monthly, semi-weekly, quarterly, or annually.

Tips for staying on top of payroll tax payments

Payroll taxes can be complicated. So, here are some tips for simplifying the process:

• Use a payroll service or software: Payroll services can automatically calculate, withhold, pay, and file your payroll taxes for you.
• Keep accurate records: Maintain accurate records of all wages paid, taxes withheld, and tax payments made. Using digital financial tools, such as Novo's business checking account, can help you keep track of your tax payments.
• Understand the due dates: Make sure you know when your tax payments are due and set reminders for yourself so that you don't miss any deadlines.
• Maintain sufficient cash flow: Ensure that you have enough funds available to cover your tax obligations.
• Consult with a tax professional: If you're unsure about any aspects of payroll tax management, it can be helpful to consult with a tax professional for advice and guidance tailored to your specific situation.

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Payroll tax filing

Filing payroll taxes is a multi-step process that involves submitting the correct forms to the appropriate government agencies and accurately reporting the amount of taxes withheld and paid. You’ll typically need to file the following forms:

• Form 941, Employer's Quarterly Federal Tax Return: Most employers use this form to report income taxes, Social Security tax, or Medicare tax withheld from employees' paychecks and to pay the employer's portion of Social Security or Medicare tax.
• Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return: This form is used to report and pay FUTA.
• Form W-2, Wage and Tax Statement: This form reports the amount of wages paid and taxes withheld for each employee. You should provide a copy to each employee and the Social Security Administration (SSA) at the end of the year.
• Form W-3, Transmittal of Wage and Tax Statements: This form summarizes the total wages and taxes for all employees for the year. It's sent to the SSA along with the W-2 forms.
• State and local forms: You'll submit these as required.

Deadlines for payroll tax filing

Deadlines for filing payroll taxes depend on the specific form and the size of your payroll:

• Form 941 is generally due by the last day of the month following the end of the quarter.
• Form 940 is due by January 31 of the year following the year being reported. If you deposited all your FUTA tax when it was due, you may have an additional ten days to file.
• Forms W-2 and W-3 are due to the SSA by January 31. You also need to provide each of your employees with a copy of their W-2 by this date.
• State and local tax filing deadlines vary by jurisdiction. So, you'll need to check with the appropriate agency.

Penalties for late or inaccurate filing

If you fail to file your payroll tax forms on time, or if you make mistakes on your forms, you can face penalties from the IRS. The penalty for late filing of federal payroll tax forms is typically 5% of the unpaid tax for each month or part of a month for which the return is late, up to a maximum of 25%.

If you fail to deposit payroll taxes on time, the penalty ranges from 2% to 15% of the unpaid taxes, depending on how late the deposit is. For state and local taxes, the penalties vary by jurisdiction.

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Final thoughts

Navigating payroll taxes can be a complex task, particularly for small businesses. Understanding the different types of payroll taxes—federal, state, local, employer, and employment taxes—is essential for avoiding fines and penalties. These taxes are calculated based on specific rates, thresholds, and income levels and are withheld from employees' paychecks or paid by employers themselves.

You must accurately calculate, withhold, and pay these taxes and report them to the relevant tax authorities using appropriate forms and payment systems. Novo's business accounts can help ensure your financial information is organized and ready for tax season.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

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