Owners Guide to Payroll Taxes

By hrlineup | 02.01.2020

Payroll taxes! Endlessly complicated, yet the success of your business lies in understanding them.

As a business owner, you are liable for several taxes, licenses fees in addition to administrative and compliance obligations.  Besides your business taxes, the federal government levy taxes on your employees, and you must withhold and submit these taxes.

That’s not all. Besides the federal taxes, businesses also have state taxes to handle when processing the payroll. Only a few states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t levy income taxes. Also, New Hampshire, DC and Tennessee don’t tax income, save for interest and dividends.

Both the state revenue agency and the internal revenue service (IRS) impose these taxes on both employers and employees based on various compensation bases. The employer is responsible for collecting the duties and filing and submitting them to both the local and federal governments.

Kinds of Payroll Taxes

Business owners, or employers for that matter, should be aware of all the types of taxes they are likely to encounter when preparing the payroll. But that’s the easy part! All these the taxes require reporting annually, and some both quarterly and annually in most cases. Failure to accurately file and remit these taxes can land your business in trouble with the taxman, which could lead to fines and penalties.

As an employer, you handle both statutory and voluntary payroll deductions.

Statutory Payroll Tax Deductions include:

  1. Federal income tax withholding.
  2. Social Security Tax withholding, – 6.2% up to the annual maximum.
  3. Medicare tax withholding – 1.45% of wages.
  4. Additional Medicare Tax withholding for employees earning over $200,000.
  5. State income tax withholding.
  6. Local tax withholdings such as city, county or school district taxes, state disability or unemployment insurance.

Employer Liabilities Payroll Taxes

There are many taxes associated with the payroll that any company must pay. So, as a business, you not only submit the withheld deductions but your portion of payroll taxes as well. These taxes are part of your business expenses. They include

  • Social Security taxes – 6.2% up to the annual maximum.
  • Medicare taxes – 1.45% of wages.
  • Federal unemployment taxes (FUTA)
  • State unemployment taxes (SUTA)
  • Federal Insurance Contributions Act (FICA) taxes, which entails the employer matching employee’s contribution towards both Social Security (6.2%) and Medicare taxes (1.45%).

 Voluntary Payroll Deductions

Voluntary payroll deductions contribute towards programs an employee has voluntarily chosen to participate in. They include:

  • Health insurance.
  • Life insurance.
  • Retirement plan contributions.
  • Employee stock purchase plans (ESPP and ESOP plans).
  • Union dues.
  • Job-related expenses.

Reporting Payroll Taxes

An employer must declare all the taxes, i.e., those withheld, both local and federal taxes, and employer liability payroll taxes. The business should then submit them within the stipulated timeframe.

Handling payroll taxes is one of the most complicated duties of a business owner. But what option do you have? It’s best to do your job diligently by first knowing what payroll taxes you with, withhold those you must, report them accordingly, and pay them promptly. And if you come from a state with income tax, the job even becomes more complicated. Always consult tax professionals to enjoy tax benefit that comes with the assiduousness of expertly handling deductions.