The burden of remitting payroll taxes is the responsibility of both employers and their employees. Oftentimes, processing payroll taxes is like enigmas to employers, mostly small and medium-sized businesses. To make matters worse, payroll tax policies vary from one state to another, and they sometimes change yearly.
While some business owners would like to save themselves the trouble of getting involved in calculating and paying the (Federal Insurance Contributions Act) FICA and withholding taxes to the government, a few others prefer to handle the process themselves.
Having a basic understanding or an overview of what works and what doesn't when it comes to processing payroll taxes for your company will save you some headaches (even if you want to outsource the process). At least, you'll be able to clarify gray areas to your employees when they come asking.
This blog explains what payroll taxes are, the types of payroll taxes there are, whose responsibility it is to pay them, when to pay them, how to calculate them, and much more.
Understanding Payroll Taxes
Payroll taxes include the employment taxes employers and their employees pay for federal and state programs, including Social Security, Medicare, unemployment insurance, and disability benefits. They also include income tax deducted from employees’ pay and other payroll tax deductions, such as those for workers' compensation and paid leave. It's important to pay these taxes on time. Otherwise, you risk getting penalties from the Internal Revenue Service.
Employers withhold a certain amount of money from employee's earnings and pay the same to the government on behalf of their employees and themselves regularly. This money is what is known as payroll taxes, and it must be deducted based on wages, bonuses, and salaries earned by employees.
The employer is responsible for calculating how much to withhold from each employee's earnings and paying the money to the appropriate taxing agencies (federal, state, and local tax authorities). You'll need the guide provided by the IRS to do this. Alternatively, you can consult with a professional HR service provider.
Revenues from payroll taxes are used to fund Medicare, Social Security, defense, recreation, education, healthcare, and other social insurance benefits.
Payroll taxes refer to other employment taxes, excluding personal income taxes. However, the concept of payroll taxes generally incorporates both income taxes (withholding taxes) and FICA taxes. Payroll taxes specifically refer to FICA (Social Security and Medicare) taxes and local taxes withheld from employees’ paychecks, and the additional percentages that the employer pays.
Unlike FICA taxes, income taxes are solely withheld from employees' salaries and are due to the respective federal, state, or local government collection agencies. Essentially, payroll taxes as used throughout the content of this post include all taxes described above. This is explained in further detail below.
What's Included in Payroll Taxes?
The payroll or employment taxes that an employer pays to the federal and state agencies on behalf of itself and its employees include the following individual taxes:
Federal Income Tax
Employers must withhold this from employees' earnings and pay it to the federal government on behalf of the employee. The amount of federal income tax withheld is generally based on the amount an employee earns. Federal payroll tax rates for 2024 are:
Social Security: 12.4% (6.2% for the employee plus 6.2% for the employer) per employee
Medicare: 2.9% (1.45% for the employee plus 1.45% for the employer) per employee
Additional Medicare: 0.9% for employees when wages exceed $200,000/year
FUTA: 6% for the employer on the first $7,000 the employee earns
Employers must use the information provided in the Form W-4, filled out by employees when onboarded to determine the amount of tax to withhold from employee paychecks. As the income of employees increases, so will the income tax due. Employers also need to include a form showing they've paid state unemployment taxes, which can qualify them for a tax credit. This credit can bring the FUTA tax rate down to as low as 0.6%.
State Income Tax
State withholding tax rates vary across the different states, but they generally work in the same manner as federal income taxes. So, you might want to check the withholding table (on the state government site) where your business is located to know exactly how much to pay.
The most common state payroll tax pays for state unemployment insurance (SUTA), and employers are required to cover 100% of the SUTA tax rate by law. Also keep in mind that there are seven states in the U.S., where employees will not need to pay income tax: Alaska, Florida, South Dakota, Texas, Nevada, Tennessee, Washington, and Wyoming. Washington also collects a state capital gains tax on earners above certain thresholds.
Local Taxes
Depending on where your business is located, you may be required to pay more payroll taxes in the U.S. These taxes are often directed to funding different local projects, such as public transportation, local health care, education, and business support. In some cases, employers are responsible, while in other cases, either the employee or both parties are responsible.
Be sure to consult a local tax expert in your state to understand your local tax responsibilities and ensure accurate remittances.
Social Security and Medicare Taxes
Both of these are called FICA taxes, i.e. Federal Insurance Contributions Act, are paid as an equally shared responsibility between the employer and employees. The employee pays one half and the employer balances the other half. To know the exact figures to withhold, see the section on "How to Calculate Payroll Taxes” or check the updated IRS guide for more information.
Additional Medicare Tax
This was introduced in January 2013 as part of the Affordable Care Act. It mandates employers to pay an additional 0.9% Medicare Tax withheld from employees' paychecks when they earn above $200,000 in a year. Employers do not contribute to the Additional Medicare tax rate.
Federal and State Unemployment Taxes (FUTA & SUTA)
FUTA is deducted separately from the employer and is deposited both quarterly and monthly. FUTA is used to fund federal programs that provide unemployment benefits to individuals who have lost their jobs.
SUTA, on the other hand, funds a state program that serves a similar purpose. Also, the rates and requirements for states differ, so check in your state to be sure. Employers are solely responsible for withholding and paying these taxes. Employees do not pay unemployment taxes.
Self-Employment Tax (SE tax)
If you work for yourself, you will be required to withhold and pay self-employment tax, which is essentially the Social Security and Medicare tax bundle for people who work for themselves. This also implies that the whole load of FICA tax will be paid by you since you do not have employees to share the responsibility with you. This tax is used to fund the services of the FUTA and SUTA.
How To Calculate Your Payroll Taxes in 2024
Calculating payroll taxes requires a fine mix of basic computing or accounting skills and a general understanding of how the taxation process works, both on the federal level and in the state where your business is located. Many businesses outsource this process to payroll management services or use payroll software, but some still run their payroll tax processing in-house. If you choose to run it yourself, here's what you need to know.
Employers and Employees
Taxes to be withheld from employees' paychecks include federal income tax and FICA taxes, and if your business is located in a state that levies an income tax, it must also be withheld from employees' paychecks. You'll also need to know how many times you`re paying and withholding taxes from your employees in a month in order to be able to run payroll.
Once these are established, you can then go ahead to calculate the gross earnings of your employees. Social security tax is calculated at 6.2% of employees' gross wages. The same goes for employers; they pay up the other half of 6.2%. Note that this tax is capped at the first $137,700 and $142,800 of earnings in 2020 and 2021 respectively.
For Medicare, both employer and employee pay the same amount of 1.45%. This brings it to a total of 15.3% per employee. The Additional Medicare tax is a 0.9% deduction from employee earnings of over $200,000 for single filers and $250,000 if they file jointly.
To calculate the federal income tax, state tax, and local income tax, you`ll need to work with the information supplied by the employee at the point of employment in the Form W-4. This shows you their filing status and exemptions. Check the IRS publication 15B to see how much tax to withhold from an employee's paycheck.
The same applies when calculating state income tax; each state provides an updated withholding tax table to guide employees on how much tax to withhold from their employees.
Self-Employment Taxes
If you're self-employed, it is your responsibility to pay both the employer and employee parts of your payroll taxes. If you're working with a contractor, they'll have to withhold 2.9% for Medicare and 12.4% for Social Security. You'll also have to withhold and remit your federal, state, and local income taxes.
Other Payroll Costs and Deductions
In addition tor your regular tax responsibilities, you may need to pay other costs at payroll, depending on legal requirements or optional benefits your company offers. These typically include:
Workers’ compensation insurance
State disability insurance
Paid leave
Health care costs
Retirement plan contributions
Reimbursements and stipends
Other benfits/deductions
Frequently Asked Questions (FAQs) About Payroll Taxes
1. What are the main components of payroll taxes in 2024?
Payroll taxes in 2024 primarily consist of Social Security and Medicare taxes, federal income tax withholding, and state and local income taxes. Employers must also contribute to federal and state unemployment insurance programs. These components ensure employees are covered under social security, healthcare, and unemployment benefits.
2. Are there any changes to the Social Security wage base in 2024?
Yes, the Social Security wage base typically increases each year. For 2024, the maximum amount of earnings subject to Social Security tax has risen to $168,000, up from $160,200 in 2023. Employers and employees each will still contribute 6.2% of wages up to this limit for Social Security.
3. How should employers handle payroll taxes for remote employees?
Employers must adhere to the tax laws of the state where the employee physically works. This means registering for payroll taxes in the state where the remote employee is located and withholding state and local taxes accordingly. Employers should stay updated on any changes in state tax regulations that may affect their remote workforce.
4. What are the deadlines for payroll tax deposits in 2024?
Payroll tax deposit deadlines vary based on the size of your payroll. Generally, employers with larger payrolls must make semi-weekly deposits, while smaller employers may make monthly deposits. Specific deadlines can be found in IRS Publication 15 (2024) (Circular E), and it’s crucial to meet these deadlines to avoid penalties.
5. What tools or resources can help employers stay compliant with payroll tax regulations in 2024?
Employers can use payroll software and services that automatically calculate and withhold the correct amounts for federal, state, and local taxes. Additionally, resources like the IRS website, state tax agency websites, and professional payroll service providers can offer guidance and updates on regulatory changes. Regular consultation with a tax professional can also ensure compliance.
Payroll Tax Penalties
Avoiding mistakes and paying your taxes as and when due will save you from tax penalties. Failing to withhold the correct amount from your employees makes you 100% liable for paying up the balance and the additional fees that may be imposed on you.
Failing to pay your payroll taxes on time, attracts a fee of 2% of the unpaid sum for 1-5 days of lateness. For 6-15 days, you'll pay a 5% penalty, and if you're behind on payment by more than 15 days, the penalty fee gets as high as 10%. If your tax remains unpaid for more than 10 days after you get the first notice requesting payment of tax due from the IRS, you'll pay additional 15% of unpaid amount.
For small businesses who outsource HR solutions to professional employer organizations (PEO), if the PEO fails to pay on time or deposits the wrong amount, the IRS still comes after you, the business owner.
Wrapping Up
Processing your payroll taxes can be complicated, but armed with the right information and tools, the whole process can become a walk in the park. There are different approaches to calculating and reporting payroll taxes correctly. You can either do it yourself, use payroll software, or outsource the entire process to a certified professional employer organization (CPEO).
Working with a CPEO saves you from errors committed by the PEO, as in this case, the IRS will hold them fully responsible for any errors on your payroll taxes. Additionally, you get to enjoy other great benefits when you partner with a PEO. If you need a reliable PEO service, you can reach out to us today at The Mission today.
The Mission makes it easy for SMBs to get the best PEO services. We are a leading partner in the PEO, HR, payroll, and benefits outsourcing marketplace. We provide result-oriented HR services for small and medium-sized organizations and government contractors, thereby serving as a trusted partner in integrated human resource compliance, risk management, employee benefits, employment practices liability insurance (EPLI), and payroll processing.