You've taken the time to write a business plan, streamline day-to-day operations, and staff your business with the right people. However, one of the tasks that can make or break a successful employer is payroll. It's critical to understand how payroll taxes work and comply with regulations.
Whether you choose to file payroll taxes yourself or use one of the best payroll companies, we've got you covered. This quick reference guide provides a thorough overview of how to complete payroll taxes accurately and on time.
What are payroll taxes?
Payroll taxes are the taxes paid on the hourly wages and salaries of your employees. Additionally, these taxes fund Social Security and Medicare. According to the Organisation for Economic Co-operation and Development, individual income taxes – federal, state and local – made up over 40% of the U.S. total tax revenue in 2018, with social insurance taxes at 23%.
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As a significant source of government revenue, half of payroll taxes are paid by employers (7.65%), and the other 7.65% is directly debited from employee paychecks. While the employer and employee share payroll taxes, most of the cost is passed on to the employee.
What you need to know about payroll taxes
You are liable for these mandatory and tax responsibilities for your company:
- Income tax withholding
- Quarterly declarations of income tax withholding and federal payroll tax
- Annual reporting of Social Security and employees' tax payments
- Federal Unemployment Tax Act (FUTA)
- State-level reporting
Here are some of the voluntary tax responsibilities you can opt for:
- 401(k) employer-sponsored plans or other retirement funding
- Flexible spending accounts (FSA)
- Wage garnishments, such as child support
What are the types of payroll taxes?
These are the four main payroll tax categories:
- Federal income tax
- Federal payroll tax
- Self-employment tax
- FUTA
How to calculate employer payroll taxes
Consider these aspects of your business when calculating payroll taxes:
- Taxable workers: These employees are subject to employer payroll taxes, while independent contractors pay their own taxes.
- Taxable wages: Taxable wages include salary, bonuses and gifts.
- Quantify withholding amounts: You'll do this for federal, state and local taxes.
We describe the main payroll tax types in more detail below.
Federal Insurance Contributions Act (FICA) tax
FICA is the combined federal payroll tax that includes Social Security and Medicare. You will pay the same combined rate as your workers: 7.65%. The following is a breakdown of the FICA taxes for Social Security and Medicare.
You pay a 6.2% tax rate for each employee for your company toward Social Security, while each staff member also pays 6.2% for Social Security. The 6.2% rate is based on the employee's gross taxable wages. Once your associate reaches $142,800 in gross taxable wages, you no longer have to withhold Social Security taxes or contribute Social Security taxes for that employee. However, the $142,800 wage base is for 2021, and may change in the future.
You are obligated to pay a 1.45% tax rate for each employee for Medicare, while your worker also pays 1.45%. This rate is based on the employee's gross taxable wages.
There is no wage base for Medicare tax. Consequently, once an employee reaches a certain wage threshold, they are required to pay an additional 0.9% in Medicare taxes based on their filing status. The 2021 thresholds are $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately).
Self-employment tax
When you are self-employed, you're considered both an employer and an employee. Consequently, you are required to pay both parts of FICA – 15.3% – toward Social Security and Medicare. This combined tax is also known as the Self-Employment Contributions Act (SECA) tax.
Of the total 15.3% in SECA taxes, 12.4% goes to Social Security and 2.9% is paid to Medicare. Filing as self-employed, you will need to pay Social Security tax until you earn $142,800 annually. After meeting that threshold, you no longer owe money in Social Security taxes.
You are also subject to the same rules as FICA regarding Medicare taxes. Once you reach the wage threshold of $200,000 (single), $250,000 (married filing jointly) and $125,000 (married filing separately), you are required to pay an additional 0.9% in Medicare taxes.
Filing Schedule SE (Form 1040) can help you estimate self-employment taxes.
Federal Employment Tax Act (FUTA) tax
While the FUTA tax is the same for all employers at 6%, the SUTA (State Unemployment Tax Act) tax varies from state to state. States can charge fees for administrative costs and job training. You'll receive a percentage range based on your employment history, and how often your workers collect unemployment.
What forms do you need for reporting payroll taxes?
You are responsible for reporting and depositing income tax and FICA for your company. However, you can choose between two deposit schedules: monthly and semiweekly. All new businesses begin as monthly depositors, but it is important to check every year to see if your status has changed.
- Monthly deposits: Monthly deposits are made by the 15th day of the following month. For example, all employment taxes for April need to be paid by May 15.
- Semiweekly deposits: Semiweekly payments made on a Wednesday, Thursday or Friday are deposited by the following Wednesday. Payments made on Saturday, Sunday, Monday or Tuesday should be completed by the following Friday.
Before each calendar year, you must review IRS Publication 15 (Form 941, 944 and 945) or Publication 51 (Form 943) to determine which deposit schedule your business requires. Late deposits can result in a penalty of up to 15%. FUTA tax (Form 940) deposits are required quarterly for tax amounts over $500. You must deposit the FUTA tax by the end of the month directly after the quarter ends.
Federal income tax and FICA
Here are the forms you need to file for federal income tax and FICA:
- Form 941: As the Employer's Quarterly Federal Tax Return, Form 941 is filed each quarter with information on sick pay withholding and supplemental unemployment benefits. The reporting due dates are April 30, July 31, Oct. 31 and Jan. 31.
- Form 943: The Employer's Annual Federal Tax Return for Agricultural Employees is used to report agricultural wages. The reporting due date is Jan. 31.
- Form 944: The Employer's Annual Federal Tax Return is for employers whose annual tax liability is $1,000 or less. The reporting due date is Jan. 31.
- Form 945: The Annual Return of Withheld Federal Income Tax is filed to report backup withholding. The reporting due date is Jan. 31.
You will need to file these forms regarding wages and W-2 forms:
- Form W-2: The Wage and Tax Statement reports wages, tips, and other employee compensation. The reporting due date is Jan. 31.
- Form W-3: The Transmittal of Wage and Tax Statements sends W-2 information to the Social Security Administration. The reporting due date is Jan. 31.
Self-employment
Self-employed individuals who own a business file taxes as a sole proprietor or independent contractor. You may also fall under the self-employed umbrella if you are a member of a partnership that owns a trade or company, or if you're in business for yourself – part time or full time.
Self-employed individuals pay an income tax and a self-employment tax (SE tax) that covers their Social Security and Medicare tax contributions. You can determine if you are subject to self-employment and income taxes whether your business made a profit or loss. To calculate your business profit or net loss, subtract your business expenses from your business income. Then, report your findings on Form 1040 or 1040-SR.
Here are the forms you'll need if you're self-employed:
- Form 1040-ES: The Estimated Tax for Individuals form helps you estimate your income taxes and FICA, since you have both the employer and employee tax responsibilities.
- Schedule C: The Profit or Loss From Business form is for annual tax returns, as it calculates your business profit or loss.
- Schedule SE: The Self-Employment Tax form is for the calculation of FICA. It includes Form 1040 or 1040-SR.
FUTA
When you file your FUTA return, you'll need Form 940.
- Form 940: FUTA is only paid by the employer. The reporting due date is Jan. 31.
What if you don't have employees?
If your small business is incorporated but doesn't have any employees, you are required to pay federal, state, local, and FICA taxes because you are the sole employee of your company.
However, you are considered self-employed if you do not have any staff and are not incorporated, and thus are required to report and pay taxes on your income quarterly.
How often are payroll taxes paid?
January is the busiest month for payroll taxes. Consider scheduling some time before the end of the year to gather and complete all of the required forms. Even if you use an accountant to complete payroll taxes, you must ensure they have all the necessary information to meet the required deadlines.
Here are the payroll tax deadlines for the calendar year:
- Jan. 31 or Feb. 1: If Jan. 31 falls on a Sunday, then all quarterly filings for Q4 and year-end filings are due on Feb. 1.
- April 30: This is when Q1 quarterly filings are due.
- Aug. 2: This is when Q2 quarterly filings are due.
- Nov. 1: This is when Q3 quarterly filings are due.
- 15th of every month: If the 15th day of the month falls on a weekend, payroll tax payments for the previous month are due on the following Monday. For example, you should submit your payroll tax payments for March on April 15.