According to the Office of Management and Budget, in 2014 Social Security, Medicare and other taxes contributed $1.023 trillion or 33.8% of total federal revenue. Individual income taxes of $1.394 trillion or 46.1% were the largest source of total federal revenue. From just these two figures alone, you can see how critically important the collection of employment tax is to the U.S. government. This makes it just as important for small business owners to understand and comply with payroll tax regulations. This article will introduce you the payroll taxes that are significant and provide insight on how your small business can meet specific standards that apply.
As an employer, you are responsible for the administration and reporting of employment taxes. Even when using a third-party payroll company to administer and report employment tax obligations, you remain responsible for meeting filing requirements. The IRS provides the following resources for employers to keep abreast of their responsibilities:
(Circular E), Employer’s Tax Guide
Starting a Business and Keeping Records
All three of these guides are great reference points for learning about your employment tax obligations. We highlight the most common tax below:
Federal Income Tax (FIT)
FIT is withheld from your employee’s paychecks in accordance with a signed Form W-4, “Employee’s Withholding Allowance Certificate” which should be received from all employees. The amount of tax collected must be paid over to The Department of Treasury according to the schedule assigned to your company by the IRS. Your deposit schedule could vary, but generally if you have been responsible for paying in less than $50,000 in payroll taxes for the past four quarters, your deposit schedule will be monthly. If you think your payroll tax liability will be less than $1,000, you can file an annual return. Payments can be paid using the Electronic Federal Tax Payment System or by sending in a check and payment voucher. In some case electronic filing is required.State Income Tax (SIT)
Most states require the use of a form like the federal Form W-4 for obtaining the information necessary to withhold the appropriate state tax amount from your employee’s paycheck. State taxes are typically paid to your state’s revenue department and must be paid throughout the year as well.
Quarterly Tax Return Filings
The federal Form 941 and a similar state return is used to summarize gross wages, taxes withheld, and total payroll tax payments made on a quarterly basis. Quarterly filings are due even if you are reporting all zeros.
Social Security and Medicare Taxes
These taxes must be deducted from your employee’s paycheck as per the requirements of the Federal Insurance Contributions Act (FICA), unless certain exclusions apply (i.e. students who work for universities, ministers who opt out, etc.). For 2017, the social security rate is 6.2% on a maximum wage base of $127,200 (adjusted annually for inflation) and Medicare is currently 1.45% with no wage limit. These taxes are generally paid in at the same time federal income taxes are paid.If you did not collect Social Security and Medicare taxes from your employees, you will need to correct this issue by filing Form 8919. Additional adjustments to prior payroll filings may be necessary, so consult with your CPA or tax professional who understands payroll tax compliance for advice.
In summary, hiring great employees come with tax rules that you must comply with or be heavily penalized when you do not. Even if you are using a payroll company to oversee this part of your business, it is best that you have at least a general understanding of these taxes since you remain ultimately responsible for the proper filing of payroll tax reports and employment taxes paid or unpaid.
If you are not sure if these rules apply to your business, have not been following the rules discussed or have fallen out of compliance and need assistance getting things back in order, we invite you to reach out to usso that we can work to help you get this resolve immediately. You may also download our free payroll tax compliance checklist to use as a guide to protect your business:
