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What Are Payroll Taxes?
Written by: Carolyn Young
Carolyn Young is a writer with over 25 years of experience in business in various roles, including bank management, marketing management, and business education.
Reviewed by: Daniel Eisner
Daniel Eisner is a payroll specialist with over a decade of practical experience in senior accounting positions.
Updated on March 3, 2023
What Are Payroll Taxes?
- What Are Payroll Taxes For?
- Wage Limits
- How to Pay Payroll Taxes
- Using a Payroll Service
If you’re starting a business and planning to hire employees, welcome to the world of payroll. It’s a complex business function that comes with countless rules and regulations.
A key element of payroll is payroll taxes, which you have to collect and pay. Simply put, payroll taxes are withheld from an employee’s paycheck and paid to the IRS.
But tackling the payroll tax challenge is much more complicated than that. Fortunately, this guide provides all the insight you need to handle payroll taxes with ease and keep your business running smoothly.
What Are Payroll Taxes For?
Payroll taxes withheld from employee paychecks fund Social Security and Medicare, to which the employer also makes tax contributions.
The Social Security tax is paid by both the employee and the employer at a rate of 6.2% of the employee’s wages. The Medicare tax is also paid by both the employee and the employer, but at a rate of 1.45%.
Employers are also required to pay taxes under the Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA). The employer must also collect federal income tax from employee paychecks, and pay that amount to the IRS. The rate is determined by the employee’s tax bracket.
Most states also have income tax and state payroll taxes that must be withheld and paid by the employer. Some localities do as well. Be sure to check with your state and local governments.
For Social Security, there is a maximum wage limit. As of the 2022 tax year, if an employee makes more than $147,000, Social Security taxes do not have to be withheld. Medicare does not have a maximum wage limit, but any individual that earns more than $200,000 per year must pay an additional 0.9%.
How to Pay Payroll Taxes
How often you pay payroll taxes depends on several factors, but it could be as often as bi-weekly.
Following IRS guidelines for withheld taxes and payroll taxes is absolutely crucial. Here are the instructions from the IRS website:
Depositing Employment Taxes
In general, you must deposit federal income tax withheld as well as employer and employee social security and Medicare taxes.
There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. To determine your payment schedule, review Publication 15 for Forms 941, 944 and 945. For Form 943, review Publication 51.
Deposits for FUTA Tax (Form 940) are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter.
You must use electronic funds transfer (EFTPS) to make all federal tax deposits. See the Employment Tax Due Dates page for information on when deposits are due. If you fail to make a timely deposit, then you may be subject to a failure-to-deposit penalty of up to 15 percent.
Reporting Employment Taxes
Generally, employers must report wages, tips and other compensation paid to an employee by filing the required form(s) to the IRS. You must also report taxes you deposit by filing Forms 941, 943, 944, 945, and 940 on paper or through e-file.
Federal Income Tax and Social Security and Medicare Tax
In general, employers who withhold federal income tax, social security or Medicare taxes must file Form 941, Employer’s Quarterly Federal Tax Return, each quarter. This includes withholding on sick pay and supplemental unemployment benefits.
File Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, if you are filing to report agricultural wages.
File Form 944, Employer’s Annual Federal Tax Return, if you have received written notification about the Form 944 program.
File Form 945, Annual Return of Withheld Federal Income Tax, if you are filing to report backup withholding.
Federal Unemployment Tax Act (FUTA)
Only the employer pays FUTA tax and it is not withheld from the employee’s wages. Report your FUTA taxes by filing Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
States and localities have their own payroll tax time frames and procedures. Again, check with your state and local governments for requirements.
Using a Payroll Service
Processing payroll and paying taxes can be terribly complex, which is why many business owners turn to a payroll service provider. It’s often less expensive than creating a new staff position for managing payroll.
Payroll and payroll taxes come with countless laws and restrictions, and a payroll service can ensure your business remains in compliance at the federal, state, and local levels.
Just send over your digital timesheets and relevant employee and business information and the service provider will take care of the calculations, payments and taxes, freeing you up to focus on running, and growing, your business.
We highly recommend hiring a payroll service — as a busy entrepreneur, you won’t regret it!
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