Basics Principles of Payroll Taxes

Computing for payroll taxes can be quite a workload especially if you are not familiar with the governing rules of payroll in your state. One of these rules is paying the correct amount of payroll taxes.

Payroll taxes are shared taxes which are shouldered by the employer and the employee through the payroll process. That is, these taxes are taken out of (withheld from) employee pay, are collected by employers and paid by employers on behalf of employees and themselves.

Money and Time

What do Payroll Taxes pay for?

The federal government levies payroll taxes on wages to fund Social Security, Medicare and other social insurance benefits. Federal income taxes also go towards things like defense and security.

State income taxes go towards a variety of areas such as education and health care, as well as transportation, state police, parks and recreation.

Kinds of Payroll Taxes

U.S payroll taxes include:

  • Federal income tax withholding (FIT)

These are taxes withheld from employee pay and are owed by the employees. The amount of FIT is determined based on the information provided in the Form W-4 upon employee hiring.

  • Taxes paid for Social Security and Medicare (FICA)

Federal Insurance Contributions Act requires payment of taxes to be used for social security and Medicare. Employers and employees share this tax, with the employer deducting the employee share (one-half of the total due) from employee wages/salaries and the employer paying the other half. For the year 2018, social security taxes are set at 6.2% and Medicare tax rates are set at 1.45% on the first $200,000 of wages and 2.35% for wages above $200,000.

How do you process payroll taxes?

Payroll taxes are based on the employee’s gross pay. An employee earns his gross pay after a certain period. From there, the employer deducts a specific amount for federal income tax which is based on the W-4 Form of the employee. Afterwards, he will deduct a specific amount for FICA taxes.

How do employers pay payroll taxes?

The payroll tax process is quite a task. It involves several steps. After deducting the calculated amounts for federal income tax and FICA tax, an employer must report and pay these to the government.

  • After completing the payroll process, you must pay for FICA taxes and federal income taxes as a whole business.
  • Remit the payments to the IRS either monthly or semi-weekly based on the size of your total employee payroll
  • The proper form for reporting payroll taxes quarterly is the Form 941.
Can employers pay payroll taxes online?

An employer after completing the payroll process and computed the amount due for payroll taxes, may choose to pay online using the Electronic Federal Tax Payment System (EFTPS). State agencies will generally have their own electronic or manual processes to submit payroll taxes.

Payroll taxes are due to the government. If not paid correctly and on time, your business may suffer from penalties and late charges and accrue interest. If you are not confident enough to process the payroll in your business, hiring a payroll service may take care of the payroll process of your business.