Employers Guide to Payroll Taxes

Employers report payroll by calculating gross pay and various payroll deductions to arrive at net pay. Payroll taxes must be withheld from an employee’s paycheck and handed over to various tax agencies.

Payroll taxes include:

1.       Federal income tax withholding  (Publication 15)

2.       Social Security tax withholding

3.       Medicare tax withholding

4.       State income tax withholding

5.       Various local tax withholdings (such as city, county, school district taxes, state disability or unemployment insurance)

Voluntary Payroll Deductions:

These deductions are withheld from an employee’s paycheck only if the employee has agreed to the deduction. They include:

1.       Health insurance premiums (medical, dental and eyecare)

2.       Life insurance premiums

3.       Retirement plan contributions (401K plan)

4.       Employee stock purchase plans (ESPP and ESOP plans)

5.       Meals, uniforms, union dues and other job-related expenses.

Employer Payroll Tax Responsibilities:

Even after paychecks have been issued to employees, the employer or the company is responsible for paying employer’s share of payroll taxes, depositing tax dollars withheld from the employers’ paychecks, preparing reconciliation reports, accounting for the payroll expense and filing payroll tax returns.

What are Employer Payroll Taxes:

The employer portion of payroll taxes are an added expense over the expense of an employee’s gross pay. They include:

1.       Social Security taxes

2.       Medicare taxes

3.       Federal Unemployment taxes (FUTA)

4.       State Unemployement taxes  (SUTA)

FICA Taxes

The Federal Insurance Contributions Act (FICA) tax consists of both Social Security and Medicare taxes. The employer and employees pay half of these taxes. Together both halves of the FICA taxes add up to 15.3%. The FICA tax is broken down into:

1.       Social Security (Employee pays 6.2% and Employer pays 6.2%)

2.       Medicare (Employee pays 1.45% and Employer pays 1.45%)

Payroll Tax Holiday: For 2011, the employee portion of Social Security was reduced to 4.2% instead of 6.2% as a part of Tax Releif Act of 2010. The employee-portion of Social Security will revert back to full 6.2% starting tax year 2012.

How Do Employers Report Payroll Taxes:

Employers are required to report their payroll tax obligations and deposit payroll taxes in a timely manner. The reporting requirements are:

1.       Making federal tax deposits

2.       Annual federal unemployment tax return (Form 940 or 940EZ)

3.       Employer’s quarterly payroll tax return (F0rm 941)

4.       Annual Return of Withheld Federal Income Tax (Form 945)

5.       Wage and Tax statements (Form W-2)