What Are Payroll Taxes?

To put it simply, payroll taxes are any taxes paid on the wages and salaries of employees and this include income tax withholding, social security and Medicare taxes, federal and state unemployment taxes, and state and local payroll taxes. Payroll taxes are used to finance social insurance programs, such as Social Security and Medicaremaking it the second largest source of government revenue in the United States.

Every business owner is accountable for withholding, reporting, and paying payroll taxes. The deduction is made from their paychecks. A business owner also has to pay the employer’s share of payroll taxes along with filing tax forms and depositing payroll tax. Filing tax is considered the most intimidating task for most small business owners.

Luckily, paying and filing small business taxes aren’t as intricate as they seem. All you need is to understand the payroll taxes types, and the filing and payment deadlines. Here is a detailed guide on everything you need to know about payroll taxes including the current rates and filing deadlines.

Federal Payroll Taxes

These are the three main types of federal payroll taxes:

  1. Federal Income Tax Withholding

An employer from an employee paycheck deducts Federal Income tax withholding. The tax amounts withheld are regulated by federal income tax tables, the pay rate, and the exemptions claimed by the employee on the W-4 form.

  1. Federal Insurance Contribution Act (FICA) Taxes

These tax are used to fund the Medicare and Social Security Programs and paid by both the employer and the employee. The employers are required to withhold the FICA taxes from an employee’s paycheck and report to the IRS along with their FICA taxes as well.

  1. Federal Unemployment Tax Act (FUTA)

The employers paid the FUTA taxes and these are used to fund unemployment compensation benefits that unemployed people receive.

State and Local Payroll Taxes

State and local governments are also have payroll taxes just like the federal government. Their payroll taxes include state income taxes and state unemployment taxes (SUTA). These are the three main types of state and local payroll taxes:

  1. State Income Tax Withholding

Apart from few states, every state is require to have their employers to withhold state and local income taxes from their employee’s wages. The states that do not impose a personal income tax includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are among the States that don’t have an income tax legislation. New Hampshire and Tennessee States do levy a tax, but only on dividend and interest income.

  1. State Unemployment Tax Act (SUTA)

Every employer is require to pay unemployment taxes at the state level. With a regular timely payments record for SUTA taxes, employers have the opportunity to claim credit that lowers their FUTA taxes.

  1. Other State and Local Payroll Taxes

There are other State and Local payroll taxes as well and these vary by location. Payroll taxes might include disability insurance payments, family leave payments, etc.

How Much Are Payroll Taxes in 2019?

Here is an overview of the rates of payroll taxes in 2019, including who will pay them and the applicable wages on which the tax applies:

2019 PAYROLL TAX RATES

 

Payroll Tax

 

Employee Pays

 

Employer Pays

 

Total

 

Applies To

Federal Income Tax

10% to 37%

None* 10% to 37% All wages

State Income Tax

0 to 13.3%

None* 0% to 13.3%

All wages

Social Security Tax

6.2%

6.2% 12.4%

Wages up to $132,900

Medicare Tax

1.45%

1.45% 2.9%

All wages

Medicare Surtax

0.9%

None 0.9%

All wages

Federal Unemployment Tax

None

6% 6%

Wages up to $7,000

State Unemployment Tax

Varies

Varies 1% to 3.7%

Varies

Apart from these payroll taxes, employers are required to pay business taxes and file a tax return separately.

While calculating payroll taxes, all supplemental wages are also considered including salaries, tips, bonuses, commissions, extra work pay, and accrued sick pay. There are different options for withholding taxes on supplemental wages from the IRS. An employer can either consider them as regular wages or withhold a flat tax separately from them. For supplemental wages more than $1 million annually, the flat tax rate is 37% and 22% for supplemental wages of $1 million or less.

Payroll Taxes Explained

Here’s a detailed overview of the different types of federal and state payroll taxes.

Income Taxes

Income taxes are usually paid on the earnings of companies and individuals. The earnings can be from any sources including wages, salaries, dividends, interest, royalties, rents, and sales. These taxes usually fund defense and national security programs and are withheld by the employers based on the taxpayer’s W-4 withholding form. When the taxpayer file a tax return, the filer either pay any remaining balance or receive a tax refund. There are different tax brackets based on income stream. A higher income entitled to a higher tax rate and each taxpayer falls into a federal tax bracket.

There are seven tax brackets in 2019 based on earnings and filing status—10%, 12%, 22%, 24%, 32%, 35%, and 37%. These taxes vary from state to state, but most states have a progressive tax system. California has the highest state income tax rate of 13.3% with annual wages of $1 million or higher.

Filing for federal income taxes can be an intimidating process, but there are income tax calculators and collaborating software’s like TurboTax, TaxSlayer or H&R Block that can help ease the income tax filing process.

Federal Insurance Contributions Act (FICA) Payroll Taxes

FICA taxes paid by employers and employees and are used to fund the social security and Medicare programs. These taxes comprise of three different taxes:

  • Social Security Tax– Both employers and employees pay the social security tax at 6.2% rate on wages up to $132,900.
  • Medicare Tax– Both employers and employees pay 1.45% in Medicare tax. Since there’s no wage cap on these taxes, it means the more an employee earns, the more you’ll have to pay in Medicare tax.
  • Medicare Surtax– Highly paid employees at pay taxes at 0.9% in Medicare surtax. Once an employee wage reaches $200,000, the employers must withholding this tax from an employee’s paycheck. The employee might receive a refund based on its total combined income and filing status. There is no employer share for the Medicare surtax.

Federal Unemployment Tax Act (FUTA) Payroll Taxes

FUTA taxes are used to fund compensation programs for the unemployed. Only employers pay FUTA and SUTA taxes and not withhold from an employee’s paycheck. The rate of these taxes is 6%, and it applies to the first $7,000 that an employee receive annually. This puts the maximum FUTA tax at $420 per employee annually.

The tax rates vary from state to state significantly. There is federal government grants of 5.4% for employers who pay timely SUTA taxes in full, bringing the effective FUTA tax rate down to 0.6%. Ths states that fall under the credit reduction state are exempted from this. In 2019, only the U.S. Virgin Islands could be a credit reduction state. Freelancers on independent individuals are exempted from FUTA or SUTA taxes, and aren’t eligible to obtain unemployment benefits.

Employer Payroll Tax Responsibilities

The responsibilities of employers is to calculate employee’s gross monthly wage earnings and different payroll deductions to ascertain the net pay. Apparently, it seems simple but calculating the payroll deductions necessitate you to be detail-oriented and accurate while making the calculations. The employer responsibilities for payroll taxes include the following:

  • Calculate and report own share of payroll taxes to federal, state, and local authorities
  • Calculate the employee share of payroll taxes to federal, state, and local authorities
  • File the payroll tax returns in accordance with deadlines
  • Provide tax records to employees and independent contractors, such as the W-2 Form and 1099-MISC Form
  • Account for payroll expenses while balancing your books

Payroll Tax Deadlines & Filing Requirements

IRS has specific guidelines for payroll tax guidelines, which illustrate you have to deposit your payroll taxes during the year and report them on the applicable tax forms. Here are the essential tax deadlines and tax forms that you need to know for payroll tax.

FICA Tax and Income Tax Filing Requirements

Here’s the schedule of due dates for filing Form 941:

  • First quarter: Due April 30, for the period Jan. 1 to March 31
  • Second quarter:Due July 31, for the period April 1 to June 30
  • Third quarter:Due Oct. 31, for the period July 1 t Sept. 30
  • Fourth quarter: Due 31, for the period Oct. 1 to Dec. 31

Generally, you shouldn’t make any tax payment with Form 941. Instead, deposit the FICA taxes separately and withheld income taxes that you report on Form 941. Make the deposit on The Electronic Federal Tax Payment System (EFTPS).

FUTA Tax Filing Requirements

You’ll have to complete and file IRS Form 940 to report FUTA taxes and the filing deadline is January 31, but extended to February 10 for those who deposited their FUTA taxes promptly.

The quarterly deadlines for depositing your FUTA taxes are April 30, July 31, Oct. 31, and Jan. 31 (same as for Form 941). For FICA taxes, deposit the FUTA taxes on EFTPS. If the FUTA tax liability is lower than $500 in a year, you can include payment along with Form 940 rather depositing the taxes on a quarterly basis. Employers are also required to file quarterly salary detail reports to record SUTA amounts at a state level.

Employee Payroll Tax Responsibilities

Employees are also required to file their payroll taxes and if they don’t have taxes withheld nor address them independently, are still accountable for these taxes and may not qualify for tax benefits. The employee responsibilities for payroll taxes include the following:

  • Provide accurate withholding tax information on Form W-4
  • Make the needed changes in the Form W-4 according to changes in the employee’s tax exemptions
  • Frequently review of paystubs, and make sure the employer is making the right deductions.
  • Inform the employer if you don’t receive a W-2 by early February
  • File payroll taxes before April 15

Know the Rules & Stay One Step Ahead

Filing for payroll taxes can be intimidating with so many taxes, rules, and deadlines. If you feel like drown yourself with the tax filing process, ask for help from a payroll software or a tax expert to automate calculations, withholdings, deposits, and reporting taxes on your behalf.

If still essential to understand why you should pay taxes and how this money is being used to fund. In addition, even if you get help from a software or a tax expert, the accountability for any mistake will always be yours. There will be penalties for late payments and not to mention, these mistakes can effect employee’s self-esteem and employing efforts. But, if you’re prepared will and understand all the relevant rules and numbers for payroll taxes, the chances of making mistakes will be lower and gaining more benefits will be higher.

Small Business Financing News │ Merchant Advisors | blog
Payroll Tax Rates, Filing Deadlines and Responsibilities in 2019
Payroll Tax Rates, Filing Deadlines and Responsibilities in 2019
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Here is a detailed guide on the payroll taxes withholding, rates, reporting and responsibilities for employers and employees for 2019.
MichaelGavin
Merchant Advisors
Merchant Advisors
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