Everything You Need To Know About Payroll Taxes

Payroll is most likely one of the largest expenses you’re responsible for as a business owner. It’s also one of the most important, as you’re the person responsible for ensuring that an employee and their family receive their salary or wages on time so they can pay their expenses.

Because payroll is so important to the employee, the IRS acts with the utmost urgency to ensure that payroll taxes are properly collected and timely remitted by businesses.

For both of these reasons - to be responsible to both your employees and the IRS and other taxing authorities - it’s a good idea for you and other small business owners to understand the importance of payroll taxes and how the payroll tax system works.

Here’s what you’ll learn in this article:

What payroll taxes are and the different types of payroll taxes

Your payroll tax responsibilities as a business owner

How payroll taxes are calculated

Deadlines to file payroll tax returns and to remit payment

Different options to pay your payroll tax liability

How to make sure your business stays in compliance

Types of Payroll Taxes

Payroll taxes are the federal, state, and local taxes associated with an employee’s taxable compensation that an employer is responsible for remitting to the proper taxing authority. Here’s a look at the different types of payroll taxes you’ll encounter as a business owner.

Income taxes

Employees owe income tax based on their wage or salary at the federal level and, if necessary, at the state and local levels. This income tax is withheld from the employee’s paycheck by the employer and paid to the respective taxing authority by the employer.

Social Security taxes - employee portion*

Employees pay Social Security taxes on 6.2% of their taxable income up to $162,200 in 2023. (This dollar amount is increased each year based on inflation.) The Social Security tax is officially called Old Age, Survivors, and Disability Insurance (OASDI). Social Security taxes are withheld from the employee’s paycheck by the employer and paid to the U.S. Treasury by the employer.

Social Security taxes - employer portion*

When an employer remits Social Security taxes withheld from an employee’s paycheck to the U.S. Treasury, the employer also makes a matching payment equal to the employee’s portion of Social Security taxes. For example, if an employee owes $1,500 in Social Security taxes, the employer must make a matching payment of $1,500 for a total of $3,000.

Medicare taxes - employee portion*

An employee pays Medicare taxes on 1.45% of their entire taxable income. Medicare taxes are withheld from the employee’s paycheck by the employer and paid to the U.S. Treasury by the employer.

Medicare taxes - employer portion*

Similar to Social Security taxes, an employer makes a matching payment equal to the employee’s portion of Medicare taxes.

Additional Medicare Tax

Employees pay an additional Medicare tax on 0.9% of their taxable income above an applicable threshold. An employer must withhold this Additional Medicare Tax from wages or salaries paid to an employee in excess of $200,000 during a calendar year without regard to that employee’s filing status or wages paid by another employer.

Federal Unemployment Taxes (FUTA)

The FUTA tax rate is 6.0% and applies to the first $7,000 paid to each employee as wages during the year.

State Unemployment Taxes (SUTA)

The SUTA tax is administered similarly to the FUTA tax but with differing tax rates and wage levels.

Read this article from the U.S. Small Business Administration’s website to learn more about the different types of payroll taxes your business might have to pay.

*NOTE: Social Security taxes and Medicare taxes are levied by the Federal Insurance Contribution Act (FICA) of 1935. Hence you may hear payroll taxes also referred to as FICA taxes.

Employer responsibilities with payroll taxes

There are several payroll tax-related tasks for which employers are responsible:

Calculating and withholding

Employers must calculate the amount each employee owes for all types of taxes. The IRS, state, local, and other taxing authorities publish booklets that walk you through this process.

Timely remittance

As a general rule for all types of federal taxes, you must deposit all withheld taxes either monthly or semi-weekly. Check with your jurisdiction about due dates for state and local taxes. Here are the different ways you can make a federal tax payment:

Submit your payment electronically via the Electronic Federal Tax Payment System (EFTPS).

Submit your payment electronically via ACH through your financial institution.

Submit your payment electronically or by check if your tax liability is less than $2,500 for a particular quarter.

Timely filing of reports

Employers must file a variety of tax returns to report payroll taxes to the respective taxing authorities.

Payroll tax returns and filing deadlines

Here’s a look at the payroll tax returns that must be filed to report the different types of payroll taxes:

Common federal forms and deadlines

Form 940: Annual FUTA tax return. The due date is the last day of January following the end of the tax year.

Form 941: A quarterly tax return that reports all federal withholdings, including the employer’s share of Social Security and Medicare taxes. The due date is by the last day of the month following the end of the quarter.

Less common federal forms and deadlines

Form 943: Similar to Form 941, except Form 943 reports all federal withholdings for agricultural employees. The due date is the last day of January following the end of the tax year.

Form 944: You can file Form 944 annually instead of Form 941 each quarter if your business has an annual payroll tax liability of $1,000 or less. The due date is the last day of January following the end of the tax year.

Form 945: Use this form to report income taxes withheld from non-payroll payments, such as pensions, gambling winnings, or other mandatory backup withholdings. The due date is the last day of January following the end of the tax year.

State forms and deadlines

State and local payroll tax return deadlines often, but not always, follow federal reporting due dates. Check with your jurisdiction about the types of tax returns and due dates for state and local taxes.

*NOTE: If a due date for filing a return or making a payment falls on a Saturday, Sunday, or legal holiday, you generally have until the end of the next business day to timely file or pay.

Ensure compliance with payroll taxes

Here are some suggestions to help you stay in compliance with payroll tax rules.

Use software. Increase the accuracy of your payroll tax reports by using a reputable software program.

Hire a payroll service provider. Even better, hire an expert in payroll taxes to do it for you.

Keep current with tax law changes. Tax laws are constantly changing. You need to stay current with the latest changes to ensure you’re staying in compliance.

Review employee information at regular intervals. Review your employee’s information at least once each year to check for significant life events that can affect their payroll taxes, such as getting divorced or married, having a child, or someone passing away.

Don’t tackle payroll taxes alone

Properly calculating wages, salaries, and payroll taxes is your responsibility as a business owner. In this article, you learned the importance of understanding how payroll taxes work so you can keep your employees happy and avoid making common payroll mistakes that can result in severe fines and penalties from the IRS.

While payroll may seem complicated and intimidating, remember you’ve got help whenever needed.

Working with a 1-800Accountant small business payroll expert, you can rest easy knowing that you’ll have a helping hand to properly navigate every payroll tax hurdle that you’ll encounter.