Payroll Tax Inclusions
U.S. federal payroll taxes include several components.
Federal Income Tax Withholding
These are taxes withheld from employee pay for federal income taxes owed by the employees. The amount of federal income tax is determined by information employees provide on the Form W-4 they complete when hired. This form can be changed by the employee at any time and as often as the employee wishes.
Social Security and Medicare
Called FICA taxes (Federal Insurance Contributions Act), this tax is shared between employees and employers. The employer deducts the employee’s share, which is one-half the total due, from employee wages/salaries, and the employer pays the other half.
Additional Medicare Tax
Employers must withhold 0.9% Additional Medicare Tax on employees’ earnings that exceed $200,000 ($250,000 for married taxpayers filing jointly). This Medicare tax has no employer match.
Federal Unemployment (FUTA) Tax
You’ll pay this tax separately from the other taxes and it isn’t withheld from employee pay.
Self-Employment Tax
This is basically Social Security and Medicare tax for self-employed individuals.
The Payroll Tax Process
To start the the payroll tax process, you’ll first calculate the gross pay for an employee. Then, based on their gross pay, you’ll deduct a specific amount for federal income tax, based on the W-4 form the employee has completed most recently. You’ll also deduct a specific amount for FICA taxes. Employers are required to deposit federal income tax and Social Security and Medicare taxes with the IRS monthly or semi-weekly. Determine the schedule before the beginning of the tax year. FUTA tax deposits are due for the quarter of the year the tax due exceeds $500. The IRS provides an Income Tax Withholding Assistant to help determine how much tax you need to withhold and report as an employer.
FICA Tax Withholding Rates
The employee tax rate for Social Security is 6.2%. The employer tax rate for Social Security is also 6.2%, or 12.4% total. The Social Security portion of the tax is capped each year at the maximum wage subject to Social Security, which is $147,000 for tax year 2022 and $160,200 for tax year 2023. The employee tax rate for Medicare is 1.45% and the employer tax rate for Medicare tax is also 1.45%, or 2.9% total. The Additional Medicare tax of 0.09% is withheld on income above $200,000 each. There is no employer match for this tax.
State Payroll Taxes
State payroll tax varies from state to state. Most states, but not all, collect tax on income. Some don’t collect tax on wages but do collect on other forms of income, such as investment dividends. In addition, some states withhold additional payroll taxes for:
State unemployment tax fundsState disability fundsState worker’s compensation funds
State payroll taxes apply to your business depending on where your employees work.
How Employers Pay Payroll Taxes
After you have calculated the amounts for federal income tax withholding and FICA taxes and withheld these amounts from employee paychecks, you must:
Calculate the amount you, as a business, must pay for FICA taxes, and set aside those amounts Make payments to the IRS either monthly or semi-weekly, based on the size of your total employee payroll Report payroll taxes quarterly using Form 941 or through E-File
Reports and deposits are due by specific dates, and if you do not remit payroll taxes or send them in late, your company could be subject to monetary fines. These start at 2% of the past-due amount for payments up to five days late. The penalty increases, up to 15% if the company is past 10 days of non-payment and the IRS has had to send out a payment notice.
