Calculating employee tax withholdings may be difficult for firms. Discover how much companies need to collect, and when and where to pay employee taxes.
What you’ll discover:
What are payroll taxes and who is responsible for them?
How do companies deduct taxes from employee paychecks?
What if I make a mistake while calculating withholdings?
What happens to employee tax withholdings and deductions?
What do I need to know about filing my first small company tax return?
Owning and operating a company entails a slew of tax obligations. If your company includes workers, one of your most critical responsibilities is to ensure that they are paid accurately and on schedule. You may be obligated to withhold payroll taxes and transfer the money to the appropriate taxation agency in order to do so. Payroll tax calculation and submission might be perplexing at first. But, if you understand how to manage payroll taxes, the work becomes lot simpler. To get you started, here are some frequent questions concerning payroll taxes answered.
Table of Contents
What are payroll taxes and who is responsible for them?
Payroll taxes are paid by both employers and workers and are based on the earnings that employees earn. Federal income tax, state income tax, Social Security tax, Medicare tax, federal unemployment, and state unemployment are the most common forms of payroll taxes. The Social Security and Medicare taxes are often referred to as Federal Insurance Contributions Act (FICA) levies.
Employers pay half of the Social Security tax and half of the Medicare tax on behalf of their workers. Businesses are also required to pay the federal unemployment tax. In most states, the employer also pays the state unemployment tax. Other jurisdictions, however, compel the employee to pay it as well.
Workers often pay federal and state taxes through withholdings. The employee must also pay the other half of the Social Security and Medicare taxes. Workers do not make these contributions to the government directly. Instead, the employer deducts a portion of the employee’s payroll taxes from the employee’s income. The employer then delivers both the employee’s and their own portion of the payroll taxes to the appropriate taxation authority.
Only the employer pays federal unemployment taxes (FUTA). In most states, the employer is also required to pay state unemployment taxes (SUTA). Nevertheless, a few states, such as Alaska and Pennsylvania, may additionally force workers to pay into SUTA. Depending on the state, these taxes may be referred to as SUI tax, reemployment tax, or state unemployment insurance rather than SUTA.
FICA taxes are paid in half by the employer and half by the employee. In most cases, the employee is responsible for the remaining payroll taxes.
How do companies deduct taxes from employee paychecks?
For 2023, Social Security taxes are equivalent to 12.4% of the employee’s first $160,200 of earnings. Both employer and employee contribute one-half of the Social Security taxes. The amount of compensation that is subject to Social Security taxes is determined by the cost of living in the United States and normally rises each year. Similarly, the Medicare tax is 2.9% of the employee’s total compensation. Again, the employer and employee share the tax burden equally. There is also an additional 0.9% Medicare tax on earnings above $200,000. Only the employee is responsible for the additional Medicare tax.
Businesses must pay a 6% FUTA tax on the first $7,000 of each employee’s salary. Most companies are also obliged to pay SUTA, however the amount varies by state. Some states may additionally levy an SUTA tax on the employee. While the FUTA tax looks straightforward, most companies get a tax credit to offset their FUTA costs depending on the amount of SUTA paid on their employees’ wages. This might make calculating the amount of FUTA difficult.
You will need the employee’s Form W-4, the employee’s gross salary for the pay period, and the IRS income tax withholding tables and tax calculator to compute your employee’s withholding. The income tax withholding tables will assist you in determining the appropriate withholding for each employee based on their Form W-4 and gross salary. The amount an employee makes before taxes is referred to as gross pay. You may conduct a similar computation to calculate your state withholdings.
Withholding errors may be very expensive. New employers may wish to seek the assistance of a tax expert until they are certain that they can conduct withholding calculations accurately on their own.
What if I make a mistake while calculating withholdings?
While computing payroll tax withholdings, mistakes are common. If you withheld too much from an employee’s salary, you must normally return the employee. You may do so by writing a check to the employee for the amount you withheld. Another alternative is to deduct less from the employee’s future paychecks until the problem is resolved.
If you withheld too little from an employee’s paycheck, you may withdraw more from their future paychecks until you have withheld the right amount. The second alternative is for your company to pay the difference.
You may need to modify the payroll tax return paperwork once you have rectified the payroll tax withholding amount. You may need to submit a Form 941-X, Form W-2c, or other IRS forms depending on the sort of mistake and the tax records you filed before finding it. If the mistake is significant, you should consult with a lawyer to determine how to correct it. If you failed not pay the correct amount of payroll taxes on time, you may face fines and interest.
What happens to employee tax withholdings and deductions?
Generally, the law requires you, the small company owner, to submit or deposit federal and state income taxes deducted from your employees’ salaries to the appropriate government agency. These may include FUTA, SUTA, as well as company and employee contributions to Social Security and Medicare. The Electronic Federal Tax Payment System is required for the payment of federal payroll taxes (EFTPS). Before sending in federal payroll taxes, you will almost certainly need to join up with EFTPS. Your company will also be needed to register in any state where you have workers. Your SUTA payments and state income tax withholdings will be remitted to the state directly. In addition, your company will almost certainly be required to submit a number of payroll tax filings. The most typically needed payroll tax return forms are Form 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Yearly Federal Unemployment (FUTA) tax Return.
The various forms of payroll taxes have varied filing dates. The filing deadlines may also be affected by the size of your company or the state in which you have workers.
Employers must typically deposit federal employment taxes either monthly or every two weeks. The IRS produces an Employer’s Tax Guide that may help you determine which of these options is best for you. FUTA is usually paid once every three months. The amount of SUTA and state income tax withheld varies by state. Most states provide online tutorials that explain how and when to submit payroll taxes. If you live in California, for example, review the 2023 California Employer’s Handbook.
It might be difficult to determine the best time to make payroll tax payments. Hiring a tax expert to assist you in developing a payroll tax deposit plan might make the process easier.
What do I need to know about filing my first small company tax return?
You may be perplexed if you are paying your company taxes for the first time. But, good tax preparation while creating your small company might save you hassles later on. The sort of company you operate typically dictates how and when you submit your small business taxes. It is important to note that you may be required to submit taxes for your company even if it was not in operation throughout the tax year.
Whether you operate a sole proprietorship or a disregarded LLC, your company taxes will most likely be filed on a Form C. The Schedule C is an attachment to your personal income tax return that has the same due date, which is normally April 15. If you own a C-corporation, partnership, or S-corporation, your company will almost certainly file a separate tax return from your personal one.
Tax returns for C-corporations are normally due on April 15. Tax returns for partnerships and S-corporations are normally due on March 15.
Whether you file your small business taxes on your own or hire a tax expert, it is critical to keep proper financial records for your company. To complete your company tax return, you will typically require a profit and loss statement and a balance sheet. If you are unfamiliar with bookkeeping, you should consider hiring an accountant to set up your company’s accounting system.