Payroll Tax Requirements

Let’s discuss and identify the payroll taxes that an employer must pay and what happens if you fail to pay the taxes.  A rather complete discussion about payroll taxes will be found in the IRS Publication 15 , or more commonly known as Circular E.

Federal Withholding:

We have a pay as you go tax system.  The Internal Revenue Code (IRC) requires employers to withhold an applicable amount of Federal Withholding to account for the Federal taxes owed on the employee’s income.  So every time the employee receives compensation a percentage is remitted as a tax payment.  The percentages are based on annual compensation and the federal tax rate associated with that income.  These taxes are paid to the United States Treasury annually, quarterly, monthly, semi-monthly or with every payroll.  The vast majority of employers will remit this tax either quarterly, monthly or with every payroll.

FICA (Social Security)

The Social Security tax is contributed and paid both by the employer and the employee.  The employee currently contributes 4.2% of their pay and the employer contributes 6.2%.  In the past the employer and the employee contribute the same amount.  The employee’s side has been reduced for the last couple of years.  Unless Congress acts, this tax break is set to expire on January 1, 2013. The employer’s side of the Social Security tax is an allowable expense to the employer.  

The Social Security tax is not paid on all wages.  The maximum wages taxed in 2012 is $110,100.  So for the first $110,100 in wages the employee will pay $4,624.  The employer will pay $6,826.20.  If you happen to be self employed, the maximum that you will pay in Social Security taxes is $11,450. These taxes are paid to the United States Treasury annually, quarterly, monthly, semi-monthly or with every payroll.  The vast majority of employers will remit this tax either quarterly, monthly or with every payroll.

Medicare

The Medicare taxes are similar to Social Security taxes.  The Medicare tax is 1.45% for the employee and matched by the employer.  Unlike Social Security taxes, Medicare taxes do not have a cap.  This tax is paid on all wages without a maximum. These taxes are paid to the United States Treasury annually, quarterly, monthly, semi-monthly or with every payroll.  The vast majority of employers will remit this tax either quarterly, monthly or with every payroll.

In my practice, we would refer to the Federal Withholding, Social Security and Medicare taxes as 941 taxes.  These are taxes that are reported quarterly to the IRS on Form 941 .  Form 941 is a reporting to the IRS to reconcile the wages paid, the taxes associated with the wages paid, and finally to account for all required payroll tax deposits.  Since January 1, 2011, these taxes must be paid online via EFTPS.  If your total taxes owed on Form 941 are less than $2,500, you need to remit the tax payment, quarterly.  This is known as the default payment frequency.  This is important to understand, because you may not need to pay your taxes more frequently than quarterly and any penalties for failing to pay your taxes will be reduced if your payment frequency is quarterly.

If your total taxes exceed $2500, at a minimum the employer must pay the taxes monthly.  A monthly filing requirement would require the employer to pay via EFTPS the payroll taxes by the 15th of the month following the month the payroll check was dated.  January’s payroll taxes are due February 15th.  If the employer’s total taxes over a 12 month period exceed $50,000 the employer must deposit the tax payment within 5 days of the date on the payroll check.

Federal Unemployment Tax (FUTA)

FUTA taxes are paid on the first $7,000 of an employee’s wages.  The FUTA rate is 6.2%, but the employer gets a 5.4% credit if the employer timely files and pays the associated State Unemployment (SUTA).  If the employer files and pays its SUTA taxes, the IRS will issue a discount of 5.4% making the tax effectively .8%.  So the employer pays $56 per employee for FUTA tax.  

FUTA tax is reported annually on Form 940 .  Most employers pay this tax quarterly, via EFTPS, then the employer files a Form 940 annually to reconcile the wages paid to the taxes owed and the taxes deposited.  Typically, an employer will calculate and pay this tax when they prepare the employer’s quarterly payroll tax reporting.  Then the employer will prepare and file Form 940, when the employer prepares the annual W-2 reporting.

W-2’s

There are no taxes due when an employer prepares and files the employee’s wage statement Form W-2.  These forms recap the year’s payroll by employee and report to the Social Security Administration the wages and compensation of every employee and a Form W-3 totals all employees.  These forms are due annually to the Social Security Administration.  They are not a tax per se; however, if an employer does not timely file these forms, the penalties are severe, 10% of gross wages.  A million dollars of gross wages equals a $100,000 penalty.  There is no tax cost to preparing ad filing W-2’s, make sure you get them prepared and filed on time.


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