Payroll taxes are an integral part of running a business. As an employer, paying employees properly is one of the most essential things that you can do. However, it isn’t as easy as it may seem. Here’s what you should know about the payroll tax return.
What Are Payroll Taxes?
Employers withhold payroll taxes from employee’s payments. Employers must pay the payroll taxes, or else they may face penalties.
These taxes, and their percentages, are:
- Medicare taxes: 1.45% of wages
- Social Security taxes: 6.2%, up to $142,800 of employee’s income (for 2021)
There are two additional payroll taxes for employers:
- Federal unemployment taxes
- State unemployment taxes
Employer Responsibility for Payroll Taxes
Employers have several responsibilities for the payroll taxes they must complete. Even after paying employees, employers must also:
- Account for payroll expenses in their financial reporting
- Deposit tax dollars withheld from employees’ paychecks
- File payroll tax returns
- Pay employer’s share of payroll taxes
- Prepare reconciliation reports
Employer Identification Number
The first step to pay your employees is to receive your Employer Identification Number or EIN. This process will allow you to work with the IRS for tax purposes. Having an EIN is also a requirement if you have employees or if you want to file taxes.
Federal Tax Deposits: Electronic Filing
It is possible to fully pay your federal taxes online, through the Electronic Federal Tax Payment System, or EFTPS. This option is convenient, but you’ll need a few things before using the service. You’ll need:
- A Taxpayer Identification Number
- This can be an EIN if you’re enrolling in EFTPS as a business; or,
- This can be your SSN if you’re enrolling as an individual
- Banking account number and routing number
- Your address and name used on your IRS tax documents
The FUTA tax is a requirement for employers. Employers will pay and report these taxes on Form 940,
There are a few rules for depositing and reporting FUTA taxes. Deposits for FUTA taxes are a requirement for quarters that the tax exceeds $500.
You must use EFTPS to make these deposits.
Tax Return Rules
Tax return rules for FUTA taxes are straightforward, especially if you’re liable for under $500 quarterly:
- If your FUTA tax liability is $500 or less, you can skip the current quarter and pay when the liability is at least $500.
- The due date will be the same as for employers that owe more than $500.
- If your liability for the fourth quarter is over $500, you’ll deposit the entire amount by the due date of Form 940.
Deposit Due Dates
FUTA taxes have a deposit due date that is the last day of the first month following the quarter’s end.
- Q1 (ends on March 31): Due date of April 30
- Q2 (ends on June 30): Due date of July 31
- Q3 (ends on September 30): Due date of October 31
- Q4 (ends on December 31): Due date of January 31 of the next year
If your FUTA tax due date falls on a legal holiday, Saturday, or Sunday, you can make your deposit the next business day.
Two additional due dates may occur in the fourth quarter:
- For employers with a liability of at least $500, you’ll deposit the entire amount by January 31.
- If your liability for the fourth quarter is $500 or less, you have more payment options:
- You can make a deposit
- Pay the FUTA tax with a credit or debit card
- Pay the tax with Form 940.
Each of the payment options has a due date of January 31.
FICA taxes consist of two categories that both the employee and employer pay:
- Medicare (1.45%)
- Social Security (6.2%)
The employee and employer pay half, which adds to a total of 15.3%. There’s an additional Medicare tax of 0.9% that employees will pay if they earn more than $200,000 annually (single) or $250,000 (married).
There are two deposit schedules available for employers filing FICA taxes: monthly and semi-weekly.
- The monthly deposit schedule allows employment tax payments by the 15th of the following month.
- Employers can use Form 941 (quarterly) or Form 944 (annually) to report their deposits.
- The semi-weekly deposit schedule allows employment tax payments on Wednesday, Thursday, and/or Friday to be due by Wednesday.
- Deposit taxes made from Saturday to Tuesday (or multiple days during this window) are due by the following Friday.
Tax Return Rules
To report FICA taxes on your Form 941, you’ll:
- Calculate your payroll tax liability
- Enter tax liability for each month in the quarter if you chose the monthly deposit schedule.
- Provide business information (in part 3 of tax form)
- Complete the rest of the form (parts 4 and 5)
Deposit Due Dates
FICA taxes are due quarterly, with Form 941 being due at the end of each quarter. If you use Form 941 to pay quarterly taxes, the due dates are:
- Q1: April 30
- Q2: July 31
- Q3: October 31
- Q4: January 31, of the next year
If you deposit all of your taxes when due, you’ll have 10 additional days to file your return. If you are a farmer, you’ll use Form 943, a special form only for agricultural employees.
If your FICA tax due date falls on a legal holiday, Saturday, or Sunday, you can make your deposit the next business day.
As with FUTA taxes, you’ll need to determine which deposit schedule you’ll use before the beginning of each calendar year.
Federal Payroll Return Requirements
Employers must pay and report federal payroll taxes. If you’re an employer, you’ll use:
- Form 940 (Employer’s Annual Federal Unemployment [FUTA] Tax Return)
- Form 941 (Employer’s Quarterly Federal Tax Return)
- Form 944 (Employer’s Annual Federal Tax Return for smaller businesses)
Federal payroll taxes must be paid online through EFTPS.
State Payroll Requirements
The exact state payroll requirements will vary by state, but it will generally include completing a tax form. Some states don’t require withholding:
- New Hampshire
- South Dakota
Employee Forms: W2 and 1099s
You’ll use two forms for your employees: Form W2 and Form 1099.
Form W-2 is the first form that’s available for employees. You’ll file this form with the Social Security Administration instead of with the IRS.
Form 1099 is the second form that is available for employees. The exact 1099 form you’ll use will depend on your employer.
There are multiple 1099 forms; some of the most common are:
- 1099-B (Proceeds from Broker and Barter Exchange Transactions)
- 1099-C (Cancellation of Debt)
- 1099-DIV (Dividends and Distributions)
- 1099-INT (Interest Income)
- 1099-MISC (Miscellaneous Income)
- 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.)
It is possible to e-file both Form 1099 and Form W-2.
Payroll Tax Return Forms
There are several payroll tax return forms that you may have to complete on behalf of your employees.
Form W-2, Wage and Tax Statement, is an IRS tax form you complete as an employer. You’ll file one W-2 per employee, even if the employee is related to the employer.
You’ll complete this Form to determine:
- Income, Medicare, or Social Security tax withheld.
- The income tax that would’ve been withheld if your employee claimed only one withholding allowance.
Form W-3, Transmittal of Wage and Tax Statements, is another tax form that you’ll complete as an employer. You’ll only complete the transmittal form if you’re submitting a paper Copy A of Form W-2.
You shouldn’t submit Form W-3 on its own. You also shouldn’t send Form W-3 if you’ve filed electronically with the Social Security Administration (SSA).
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is the third tax form you’ll complete as an employer.
You’ll complete this form to report your annual FUTA tax.
Form 941, Employer’s Quarterly Federal Tax Return, is another tax form you may complete as an employer.
You’ll complete this form to:
- Pay the employer’s portion of Medicare tax.
- Report income taxes, Medicare tax withheld from employee’s paychecks, or Social Security tax.
Form 944, Employer’s Annual Federal Tax Return, is another tax form you may complete as an employer.
This form is unique, as it is available for small employers that have an annual liability of under $1,000 for:
- Social Security
- Withheld federal income taxes
Employers using Form 944 to file and pay these taxes will pay taxes once annually instead of quarterly.
Form 1094-B, Transmittal of Health Coverage Information Returns, is another tax form that you may complete as an employer. This form is the transmittal form that employers must file with Form 1095-B.
Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, is another tax form that you may complete as an employer. This form is the transmittal form that employers must file with Form 1095-C.
Form 1095-B, Health Coverage, is another tax form that you may complete as an employer.
You’ll complete this form to report information to both the IRS and taxpayers.
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is the final tax form you may complete as an employer.
You’ll complete this form if your company is an Applicable Large Employer or ALE.
Maintaining Payroll Tax Records
You should also maintain how long you keep your payroll tax records. For several tax situations, there’s a period of three years. However, other tax situations have a requirement of up to seven years.
It is important to pay your payroll taxes on time and without errors. If you don’t, you may face penalties that can quickly add up over time.
Some of the penalties include:
Failure to Respond
You have 10 days to respond if the IRS sends you a demand of payment. If you don’t respond in time, you’ll have a penalty of 15%.
- For late payments, the IRS will add a 2% penalty for payroll taxes received within five days after the due date.
- For late payments six to 15 days late, the penalty increases to 5%.
- For late payments 15 or more days late, the penalty increases to 10%.
- If you don’t pay the IRS payroll taxes, the IRS can enforce an individual penalty, of 100%, to the employer.
- This penalty overrides any liability protection from the business entity structure. You’ll remain liable for this penalty even if your business is a corporation or LLC.
- This penalty also applies even when your business declares bankruptcy.
- The IRS can also pursue legal action against employers that refuse to either collect or pay payroll taxes.
When are Payroll Taxes Due?
Payroll taxes are due according to the form you use. By January 31, you must file the following forms:
- Copy A of W-2 and W-3
- Form 940
- Form 943
- Form 945
For Form 940 and Form 945, you’ll have 10 additional calendar days to file if you deposit all taxes when due.
By the end of each quarter (April 30, July 31, October 31, and next January 31), you must file Form 941. For Form 941, you’ll have 10 additional calendar days to file if you deposit all taxes when due.
How Do I Calculate Payroll Tax Deductions?
To calculate your employee’s payroll tax deductions, you’ll do the following:
- Get a W-4 Form from each employee
- Calculate employee’s gross pay
- Calculate overtime:
- Hourly employees can receive overtime if they work more than 40 hours weekly.
- Salaried employees may be exempt from overtime.
- Adjust gross pay for Social Security wages
- Calculate Federal Income Tax withholding amount
Now, you can determine deductions for Medicare, Social Security, and state deductions. There are other deductions that you may qualify for, by:
- First, withhold FICA taxes from your employee’s paychecks.
- Next, determine the income tax deductions that may apply in your state.
- Calculate deductions for 401(k), charitable donations, health plan coverage, internal company funds, or other retirement plans
Working with Payroll Experts
It is crucial to pay your employees properly, use the right tax forms, and avoid tax penalties. Work with the pros at 1-800Accountant for the best advice and guidance for your payroll tax returns.