Payroll Taxes: A Guide for Employers

As a business owner, you’re responsible for paying and reporting federal and state taxes on behalf of your employees and business. You must keep track of all the required tax deductions and deadlines to ensure you’re following proper tax laws. Learn what pay roll taxes are, types of deductions, your responsibilities as an employer and people to hire to assist with your taxes. 

 

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What are payroll taxes?

Payroll taxes are taxes you withhold from an employees’ paycheck and deposit as payment to the necessary taxing agencies on the employees’ behalf. As a business owner, you’re responsible for implementing a payroll process that follows tax laws, calculates the amount to deduct from an employees’ paycheck, deposits the correct amount of tax dollars by the deadline and provides quarterly reports about these tax withholdings. 

 

Net pay and gross pay formulas

Gross pay is the amount employers pay employees before deducting taxes. It’s the salary offer you make to employees when you first hire them. The final amount after tax deductions is the net pay, also known as take-home pay. The gross pay formula is: 

Pay rate x hours worked = gross pay

Follow this formula to determine net pay: 

Gross pay – payroll tax deductions – voluntary payroll deductions = net pay

 

Types of payroll deductions

You must remain aware of all the payments you need to make on your employees’ taxes to understand how much to deduct from their checks each pay period. The two main types of payroll deductions include: 

 

Required 

You’re legally required to withhold specific dollar amounts from an employee’s paycheck to distribute to certain tax agencies. The deductions you’re required to take out and deposit are:

  • Federal income tax: The amount deducted depends on the employees’ gross salary amount, marital status and how many allowances they’ve claimed on their W-4 tax form. 
  • Social security tax: This contribution goes toward retirement for American citizens. You and your employee both contribute an amount that’s equal to 6.2% of your employee’s gross income, which is 12.4% all together. If the taxable amount goes over $137,700, no additional tax amount is withheld.
  • Medicare: This supports health care coverage for people eligible for Medicare. Your employee must have 1.45% taken from their paycheck and you match that contribution. 
  • Additional Medicare: Once an employee earns over $200,000 from your business, you must withhold an extra .9% of their paycheck for additional Medicare tax. For someone who files jointly, they must make $250,000, and married people who file separately must earn $125,000 to qualify for this tax deduction.
  • State income tax: The amount you withhold for state income tax varies among states. View your state’s specific income tax rates to ensure you’re deducting the correct amount.
  • Local taxes: Different cities may require you to pay a certain amount of taxes for employees. Depending on the city both you and your employee are in, the tax amount ranges from a flat rate to a more complex bracketed system. Research your city’s local tax amount to learn how much to deduct.

 

Voluntary 

Additional deductions are typically withheld from an employee’s paycheck if they give you permission. These deductions usually go toward certain benefits the employees wants to participate in, which include:

  • Health insurance premiums: This includes medical, dental, eye care and other health care covered by your insurance company. 
  • Life insurance premiums: If you provide employees with life insurance, employees must pay a premium unless you decide to pay the premium amount for them. 
  • Retirement plan contributions: This is money employees can set aside for their retirement. They usually decide how much they’d like to deduct from their paycheck each pay period. 
  • Employee stocks: You can offer your employees a stock plan that lets them invest a certain percentage of their paycheck in your business’ stock.
  • Union dues, uniforms, meals or additional expenses: Employees may have additional amounts like dues to withhold union memberships, money to pay for their uniforms or pay for lunch or dinner if your business provides meals. 

 

What payroll responsibilities are employers in charge of?

There are several tasks you must complete as an employer to ensure you’re correctly paying taxes and following all payroll tax laws. These responsibilities include:

  • Depositing tax dollars on your employees’ behalf
  • Figuring how much income tax you must withhold from your employee’s paycheck
  • Preparing your Payable and Receivables Reconciliation reports
  • Paying your share of payroll taxes
  • Using financial reporting to account for your payroll expenses
  • Filing the tax returns for payroll
  • Developing a set deposit schedule for employee taxes
  • Creating quarterly reports about employee taxes you withheld and deposited 
  • Submitting annual reports to the Social Security Administration and to your employees regarding employee tax payments

 

Who to hire to handle payroll taxes

Paying your taxes is often an overwhelming and time-consuming process. Luckily, there are employees qualified to handle payroll responsibilities for you: 

 

Payroll manager

A payroll manager serves on your administrative staff and regularly manages your employees and their payroll. Common responsibilities include overseeing your entire payroll process, handling state, federal and other mandatory tax payments and collecting information regarding which voluntary deductions employees want to opt-in to. 

The best time to hire a payroll manager is when you have employees working in different states and a mixture of employees who make salary and hourly pay. Search for candidates with strong time-management and productivity skills to help you determine the best employee to hire for this role.

 

Payroll specialist 

Payroll specialists help a growing business handle a majority of their expenses. Their responsibilities include updating banking information for employees’ direct deposit payments, filing all payroll records and troubleshooting and fixing all issues related to payroll. Find a payroll specialist with strong attention to detail and experience working in payroll management. 

 

Payroll clerk 

Payroll clerks handle employee payments by organizing their time sheets and ensuring they’re paid on time. Common responsibilities include recording payroll data in your company’s payroll software, recording and reporting employee payment concerns to the HR manager, withholding employee tax amounts and preparing and distributing manual checks to employees. Look for payroll clerk candidates who have strong data entry skills to ensure they’re inputting time sheet and payment information correctly. 

 

Frequently asked questions about payroll taxes

 

What type of tax is payroll tax? 

Payroll tax is tax imposed on employees and employers. They each must pay taxes to certain tax agencies. Most of these tax amounts are calculated based on the employee’s salary percentage.

 

How do you figure out payroll taxes?

To figure out how much to pay for payroll taxes, you must collect the following forms: 

  • W-4: Employee’s withholding certificate 
  • State W-4
  • 1-9: Employment Eligibility Verification
  • Direct Deposit Authorization

These forms help you calculate how much to withhold from employees’ taxes. Subtract mandatory and voluntary deductions from your gross pay to figure out your final payroll tax amount.

 

Why is there a payroll tax?

Payroll taxes exist to to financially support American citizens. When you’re paying federal payroll taxes, these funds go toward social insurance programs like Medicare and Social Security. Most state and local income taxes fund public expenses like education, health care services, city construction, public employee salaries, local parks and other economic development efforts. 

Take your time calculating your business’ payroll taxes to ensure you’re withholding the right amount from employees’ paychecks. It’s best to hire additional help or ask a colleague to make sure you’re completing your payroll responsibilities correctly.

 

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