Payroll taxes refer to the business taxes that business owners and employees must pay as part of the payroll process. These taxes include both those withheld from employees' wages and those that employers are required to pay to local governments and the federal government through systems like the electronic federal tax payment system (EFTPS). These taxes are essential for supporting programs like Social Security and Medicare, which are funded through FICA taxes under the Federal Insurance Contributions Act.
Employee Taxes
An employee’s gross pay is the total amount of their earnings before payroll deductions such as taxes, insurance, and retirement contributions are taken out. After these deductions, the remaining pay is referred to as net pay. Common employee taxes include:
Federal Income Tax: This tax is based on an employee’s income and their filing status, such as single or married. The employer calculates and withholds this tax based on the withholding amount indicated on IRS Form W-4. The IRS expects employers to accurately calculate taxable wages during each pay period.
FICA Taxes: These include Social Security and Medicare taxes. The Social Security tax rate is 6.2% for both employers and employees on wages up to the wage base limit of $168,600 for 2024. Employers must report these employee contributions and employer share to the Social Security Administration.
Medicare Tax: Both employers and employees pay a 1.45% Medicare tax, with no wage cap. An additional 0.9% is withheld for employees earning more than $200,000 per year.
State Income Tax: This tax depends on state law, and like federal taxes, is deducted from an employee's paycheck. Some states offer tax deductions or tax credits to taxpayers based on their income.
Local Taxes: Certain municipalities require additional local taxes to be withheld, based on an employee's earnings.
Paid Family and Medical Leave: In some states, laws mandate that employers and employees contribute to a state leave fund to support paid family and medical leave programs. This may also be part of disability insurance requirements.
Employer Taxes
In addition to taxes withheld from employees' wages, business owners must pay employer taxes that are calculated as part of the overall payroll process. Some of these taxes include:
Federal Unemployment Tax Act (FUTA): Employers pay FUTA taxes at a rate of 6% on the first $7,000 of each employee's taxable wages. Employers can claim a tax credit of up to 5.4% if they pay state unemployment insurance.
State Unemployment Insurance (SUI): Each state determines the rate for unemployment insurance. These rates are based on the employer's payroll and can change annually.
Employer's Share of FICA Taxes: Employers must match the FICA taxes (6.2% for Social Security and 1.45% for Medicare) that employees pay, based on the wage base and current payroll tax rates.
Employer's Quarterly Federal Tax Return (IRS Form 941): Employers must file this form to report tax calculations, including FICA taxes and tax deductions made on behalf of their employees.
Additional Payroll Tax Information
Employers are responsible for ensuring they meet all due dates related to payroll taxes. This includes reporting employee contributions on forms like the Form W-2 at the end of the year. Business owners using payroll services or paying independent contractors may also have additional reporting obligations to the Internal Revenue Service (IRS). Accurate tax reporting helps avoid penalties and ensures compliance with the IRS.
Finally, it's important to note that self-employed individuals are required to pay both the employee portion and the employer share of FICA taxes. These business owners must calculate and remit their own payroll taxes through the EFTPS, ensuring they remain compliant with federal government regulations.