Required Payroll Taxes for Employers
As an employer, you face the important task of withholding payroll taxes for employees and paying them to the government. It can get complex, so you need to have a formal process.
Employers generally must withhold income tax from employees' wages. To figure out how much tax to withhold, you need to use the employee's Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. You'll deposit your withholdings based on your business and the amount you withhold.
File returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to employees. Each employee needs a completed copy. You will use Form W-3, Transmittal of Wage and Tax Statements, to transmit Form W-2 to the Social Security Administration.
Other key responsibilities
You must withhold Social Security and Medicare taxes from employees' wages and make sure they submit the matching amounts. (Something else to budget for!) To figure out how much tax to withhold, use the employee's Form W-4 and the methods described in Publication 15, Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. Deposit the taxes you withhold. You can find the detailed requirements for depositing on the IRS.gov website.
The current tax rate for Social Security is 6.2% for you and 6.2% for the employee. For Medicare, the current rate is 1.45% for you and 1.45% for the employee, or 2.9% total. Also, an Additional Medicare Tax applies to an individual's Medicare wages that exceed a threshold amount based on the taxpayer's filing status. You'll withhold an Additional Medicare Tax of 0.9% for single filers who make more than $200,000. For married couples filing jointly, the threshold is $250,000, but if filing separately, $125,000. You don't have to match this additional portion.
The government generally adjusts the earnings subject to Social Security each year. For 2023, the maximum earnings were $160,200.
Employers report and pay taxes under the Federal Unemployment Tax Act. The FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is often referred to as the federal or FUTA wage base. Your state wage base may be different based on the respective state's rules.
Mark your calendar with key dates. The IRS has an Employment Tax Due Dates page with information on what you need to do and when you need to do it. The matching share of the Social Security and Medicare payroll taxes are collected as the Federal Insurance Contributions Act taxes and your part is considered a business expense, not a liability. Because it's a business expense, it can be written off at tax time.
Don't forget the states
This is just the beginning of an employer's responsibilities. You are likely subject to state withholding rules as well. It's essential that employers be on top of the general rules and any annual rate changes. Understanding these tax issues is important, since you bear the responsibility of fulfilling your tax obligations relating to your employees. It's important to send out payments on time to avoid penalties and late fees. Be sure to work closely with financial professionals to make sure you stay compliant.