Employers are responsible for a variety of taxes, including the withholdings for their employees and quarterly estimated taxes for their business. Payroll tax, or employment tax, is a huge part of your business finances, and the stakes can be high for you and your employees. It’s critical to understand what your tax responsibilities are and exactly how to file payroll taxes on behalf of your business.
Today we’re breaking down exactly what falls under the umbrella of payroll taxes and how to calculate and file payroll taxes as a business owner.
What are payroll taxes?
Payroll taxes, or employment taxes, are the taxes withheld from an employee’s paycheck by the employer and paid to the IRS on a quarterly basis. These taxes include:
- Income tax (state and federal)
- FICA (Federal Insurance Contributions Act: Social Security tax and Medicare tax)
- FUTA (Federal Unemployment Tax Act)
- State unemployment tax
Employers will manage a significant portion of employment taxes on behalf of their W-2 employees. Self-employed individuals are responsible for their own employment taxes (though they’re able to deduct the amount that would have been covered by the employer if they were W-2 employees).
Payroll taxes are also called employment taxes, and constitute a significant portion of payroll deductions. Payroll deductions are all of the combined fees withheld from employee compensation (i.e. the difference between gross and net pay). Payroll deductions include payroll taxes, 401(k) contributions, and child support or wage garnishments.
Let’s dive deeper into the taxes covered by payroll or employment taxes.
Employees complete Form W-4 when they initiate employment (or anytime their tax status changes) to determine their income tax withholdings. Every American is required to pay taxes on their income, based on their tax bracket. Throughout the year employers will withhold the amount chosen by the employee, submitting it quarterly. In April, employees will be responsible for paying additional taxes or will receive a refund for any excess taxes paid on their behalf.
2021 income tax brackets
What’s the difference between income tax and payroll tax?
Income tax is a part of payroll taxes. Employees use their Form W-4 to determine how much withholding tax should be taken for income taxes, then the remainder of the payroll tax includes FICA and state taxes.
All individuals contribute to the Social Security and Medicare funds with FICA (Federal Insurance Contributions Act) taxes. These funds benefit Old Age, Survivors, and Disability Insurance (OASDI) and medical care for individuals age 65 and older. FICA taxes comprise 15.3% of your employee paycheck. Employers and employees split this cost—employers cover 7.65% and employees cover 7.65% from their earnings.
Employees receiving $200,000 or more will be subject to additional Medicare withholding at 0.9% of income over $200,000. This additional Medicare tax is covered completely by the employee but is the employer’s responsibility to track, withhold, and pay.
The Federal Unemployment Tax Act (FUTA) provides funding for unemployment. Federal unemployment taxes fund unemployment payments and benefits, and are exclusively covered by employers. Employers owe 6% of the first $7,000 paid to each employee. If paid through state unemployment taxes, the maximum will be $42 for each employee.
Note: Unemployment is managed at the state level, but funding originates at the federal level. If you are experiencing unemployment due to the pandemic, the Pandemic Unemployment Act (PUA) along with other COVID-19 relief programs may be available.
State unemployment tax
Depending on your state, you may also be required to pay state unemployment taxes (SUTA). You can claim up to 5.4% as a credit toward your federal unemployment taxes, meaning state unemployment will almost completely cover your FUTA taxes, if required. Check this guide to determine the state unemployment taxes required in your state.
What are your employer tax responsibilities?
As an employer you have distinct responsibilities regarding taxes and employee withholdings. Here’s a brief list of your employer tax responsibilities:
- Income tax withholding (determined by each individual employee via a Form W-4), both federal and state.
- FICA withholding 15.3%, for which you cover 7.65%.
- FUTA and state unemployment withholding.
- Any additional withholding from employee paychecks, such as 401(k) contributions, flexible or health savings accounts, or child support garnishment.
- Quarterly estimated taxes on behalf of your employees and your business.
- W-2 forms for annual tax returns.
How do I handle independent contractor taxes?
Independent contractors are not considered employees, so you will not be responsible for their payroll taxes. However, if you pay them more than $600 during the course of the year you will file a Form 1099-NEC with annual returns.
How to calculate payroll taxes
Payroll taxes are ultimately determined by employees and federal tax law. All employees need a current Form W-4, (or withholding certificate), on file to determine the amount of taxes withheld from each paycheck. A W-4 will indicate your filing status (joint, married, etc.) as well as your general tax bracket and withholding tables.
Once you’ve calculated payroll taxes for each employee, set up employer withholding that will separate the amount from their gross pay before each paycheck. Set a regular cadence for payroll withholding deposits, and keep careful records to make tax withholding returns easier to file.
Is payroll tax on gross wages?
Yes—payroll tax begins with gross wages and then uses your withholding allowance and employment taxes to determine how much will remain as your net pay.
How much should I withhold from employee paychecks?
Employers are required to withhold the amount indicated on the employee Form W-4, with 7.65% for FICA, and any 401(k) or other payments as requested by the employee. Employees need to accurately complete the Form W-4 Employee Withholdings Certificate to ensure the appropriate amount of employer tax withholding on each paycheck. Tax withholding can be adjusted at any time, so be sure to update regularly and educate your employees on which tax withholdings you’re processing for each paycheck.
How can payroll software help me with payroll taxes?
Most payroll software programs allow employers to automate payroll taxes. Withholding deductions are predetermined using state and federal guidelines in combination with the employee’s withholdings from their Form W-4. Documentation of withholdings makes filing quarterly estimated taxes much easier, as well as generating annual Form W-2 for employee tax returns.
Employer tax returns and tax forms
Depending on your industry and employees, you may have to file a wide range of returns. Tax returns are simply documents that indicate the amount of taxes paid over time, and for which specific purposes.
- Form W-2: annual return for employees
- Form 940: employer’s annual FUTA tax return
- Form 941: quarterly tax return reporting income tax withholding and FICA tax withholding
- Form 943: annual return for agricultural employers
- Form 944: annual return for small businesses (instead of quarterly)
- Form 945: non-payroll employee payments report, like pensions
- Form W-3: annual report for Social Security Administration
Carefully review each of these tax return forms and accompanying instructions to be sure you understand the appropriate employer paycheck withholdings and that you’re reporting the tax withholdings you’re regularly paying.
Employer tax deposits
Tax returns are documentation through forms. Tax deposits are the actual money being paid on behalf of businesses and employees. The IRS mandates regular payroll tax deposits, monthly for most employers and semi-weekly for large employers. These tax deposits can be made via EFTPS. Check with your state for their procedure regarding state employment taxes.
How do I file payroll taxes?
Payroll taxes can be deposited to the IRS monthly (or semi-weekly if you are a large company) through the Electronic Tax Payment System or EFTPS. Quarterly estimated taxes can also be deposited to the IRS, and accompanying Form 941 (for FICA reporting). Annual tax filings will include Form 940 for FUTA, Form W-2 for employees, and W-3 to the Social Security Administration.
How often do I need to file employer taxes?
Payroll taxes should be deposited monthly, FICA tax forms should be filed quarterly, and annual taxes should be filed to indicate FUTA and FICA payments with W-2 filings.
When are payroll taxes due?
Payroll taxes are due quarterly (April 30, July 31, October 31, and January 31). See our 2021 tax deadline calendar to stay on top of small business tax filing dates.
Why payroll taxes matter
Payroll taxes are used by the federal government to fund Social Security, Medicare, Unemployment, and other programs. Odds are, every employee will be leveraging these programs at some point in their life, so it matters to the IRS that you’re submitting your payroll taxes correctly.
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