What are payroll taxes?
Payroll taxes include both taxes withheld from an employee’s paycheck and employer-paid taxes that are remitted to the appropriate tax agencies. These taxes may also include the employer’s matching contributions for Social Security and Medicare.
It is the employer’s general responsibility to pay unemployment taxes under the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA), which are not deducted from employee paychecks. These taxes are typically employer-paid obligations and are usually not withheld from employees’ wages.
Specific rules can vary by state or by the employer’s payroll structure, so businesses may wish to review guidance from the Internal Revenue Service or their state workforce agency for current requirements.
Business owners are generally expected to help implement and maintain payroll processes that align with applicable federal, state and local tax laws. This includes calculating the amount to deduct from employees’ paychecks, depositing the correct amount of tax dollars by the deadline and providing quarterly reports about these tax withholdings.
“It is considered a good practice to maintain a payroll tax compliance calendar to avoid late deposits, which may lead to penalties and interest from the IRS and state agencies. These fees can add up quickly.”
—Tarik Griffith, accountant
Net pay and gross pay formulas for payroll tax
There are two types of pay in most organizations, gross pay and net pay. Gross pay is the amount employers pay employees before taxes are deducted. Gross pay typically reflects an employee’s total earnings for a pay period, including salary or wages, bonuses, and overtime, where applicable. The final amount an employee takes home after tax deductions is known as net pay or take-home pay.
The formula to calculate gross pay for salaried employees is:
Annual salary/number of pay periods = gross pay
The formula to calculate gross pay for hourly employees is:
Hours worked x hourly rate = gross pay
The formula to calculate net pay is:
Gross pay – payroll tax deductions – voluntary payroll deductions = net pay
Types of payroll deductions
As an employer, there are several payroll deductions you may be required to apply to employee paychecks each pay period. These deductions fall into two main categories, required and voluntary.
These details explain both categories:
Required deductions
Employers are generally required to withhold certain taxes from employee wages and remit those amounts to the appropriate tax authorities. The deductions you’re required to take out and deposit at these agencies are:
- Federal income tax: The amount of federal income tax deducted will depend on the employee’s gross salary amount, based on information provided on Form W-4 (such as filing status, dependents, and other adjustments).
- Social Security tax: This contribution helps fund retirement for those who are eligible. You and your employee both contribute an amount that’s equal to 6.2% up to the annual Social Security wage base, which is adjusted each year (refer to current IRS limits).
- Medicare: These deductions support healthcare coverage for eligible individuals. 1.45% of an employee’s paycheck must be deducted for this contribution, and the business must match it.
- Additional Medicare: Employers must withhold an additional 0.9% on wages over $200,000 per employee, regardless of filing status. Employees reconcile thresholds on their tax return.
- State income tax: The amount of tax a business withholds varies by state. It’s important to confirm your state’s specific income tax rates to verify you’re deducting the correct amount. For multi-state employers, consider using a multi-jurisdiction payroll compliance tool to manage varying state and local tax requirements.
- Local taxes: Depending on the jurisdiction, employers may be required to withhold and remit local taxes on behalf of employees. Local tax amounts range from a flat rate to a more complex bracketed system, depending on the city you and your employee reside in. Research your city’s local tax requirements to learn how much to deduct.
Voluntary deductions
Beyond required payroll deductions, an employee may be able to authorize additional amounts to be withheld from their paycheck. These are known as voluntary deductions and are typically directed toward certain benefits the employees want to participate in.
These are examples of voluntary deductions:
- Health insurance premiums: This includes medical, dental, optical care and other healthcare covered by your insurance company.
- Life insurance premiums: If you provide employees with life insurance, they are typically required to pay premiums unless you decide to pay them on behalf of the employee.
- Retirement plan contributions: Employees can set aside funds for their retirement and, in many cases, decide how much they’d like to deduct from their paycheck each pay period. Contributions under 401(k) may be pre-taxed for federal income tax purposes, but are still subject to Social Security and Medicare taxes.
- Employee stocks: You may choose to offer your employees a stock plan that enables them to invest a certain percentage of their paycheck in your company’s stock.
- Union dues, uniforms, meals or additional expenses: Employees may have additional amounts to withhold, such as dues for union membership, money for uniforms or meal costs if your business provides them.
Employer payroll responsibilities
There are several payroll-related tasks an employer may be required to complete to verify they properly withhold and remit taxes and comply with all payroll tax laws.
These responsibilities may include:
- Depositing tax dollars on your employees’ behalf
- Determining how much income tax you must withhold from an employee’s paycheck
- Preparing payroll reconciliation reports
- Paying a share of payroll taxes
- Using financial reporting to account for payroll expenses
- Filing tax returns for payroll
- Developing a set deposit schedule for employee taxes
- Creating quarterly reports about employee taxes withheld and deposited
- Submitting annual reports to the Social Security Administration and to employees regarding employee tax payments
Implementing internal controls is important to support the separation of duties. For example, to promote payroll security and accuracy, the person preparing payroll is typically not the same person authorizing payments.
Hiring considerations to manage payroll taxes
As an employer, there are several qualified roles to help manage payroll duties on behalf of your business. These are some roles you can hire to provide support with payroll taxes:
Payroll manager
A payroll manager is part of your administrative staff and manages your employee payroll. Ideal payroll managers are proficient in payroll compliance audits and understand federal and state wage-hour laws. Common responsibilities include overseeing the payroll process, handling state, federal and other mandatory tax payments and confirming which voluntary deductions employees want to make.
It can be especially helpful to hire a payroll manager when you have employees working in different states and a mix of salaried and hourly employees. Search for candidates with strong time management and productivity skills to identify the best employee for this role.
Payroll specialist
Payroll specialists primarily manage payroll processes, including wage payments, tax filings, and payroll recordkeeping. Their responsibilities will typically include updating employee banking information for direct deposit payments, filing all payroll records and troubleshooting payroll issues. Whenever possible, seek a payroll specialist with strong attention to detail and prior experience in payroll management.
Payroll clerk
Payroll clerks handle employee payments by organizing their time sheets and verifying they’re paid on time. Common responsibilities include recording payroll data in your company’s payroll software, reporting employee payment concerns to the HR manager, withholding employee tax amounts and preparing and distributing manual checks to employees.
When hiring a payroll clerk, look for candidates with strong data entry skills to verify they’re entering timesheets and payment information correctly. If possible, have a senior payroll or HR professional review their work for accuracy before submission.
This article is based on information available at the time of writing, which may change at any time. Indeed does not guarantee that this information is always up-to-date. Please seek out a local resource for the latest on this topic.
