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)

Student Taxes

Won a scholarship or fellowship?

All or part of a scholarship or fellowship may be taxable, even if you did not receive Form W-2.

A scholarship is an amount paid for the benefit of student at an educational institution in a graduate or undergraduate program.

A fellowship grant is an amount paid for the benefit of an individual to aid in the pursuit of study or research.

What is excluded:

1.       Tuition and fees required for enrollment or attendance.

2.       Fees, books, supplies and equipment required for the courses.

What is taxable:

Any part of the grant used for other purposes, like room and board.

Payment for services: Sometimes there are conditions to provide a service, in return of a grant. All payments that are received for past, present or future such services are taxable. It also includes Fulbright students and researchers.

For more information on Taxable Scholarships and Fellowships visit
http://www.irs.gov/pub/irs-pdf/p970.pdf

Student Loan Interest Deduction:

This deduction can be claimed in addition to itemized deductions. Student loan interest on loans issued for self or spouse (if filed jointly) and for any dependants can be deducted from taxable income. The maximum amount of tax deduction that can be claimed is limited to $2500.

·         For income ranges between $60,000 and $75,000, the deduction for student loan interest will be prorated. ($120,000 to $150,000 for married people filing jointly)

·         For incomes > $75,000 (> $75,000 for married filing jointly) the student loan interest is not deductible at all.

Phase outs for Student loan interest deductions:

Starting with the year 2013, the deduction will revert to an older law in which student loan interest will be deductible only for the first 60 months of repayment.

How to claim the deduction:

No special forms are needed to claim the student loan interest deduction. The deductible amount is simply written on Line 33 of Form 1040, or line 18 of Form 1040A, and subtracted from the income.

Which Student Loans Qualify:

The loan must be taken to pay qualified higher education expenses which include cost of tuition, fees, room and board, books, equipment, and other necessary expenses such as transportation in any accredited post-secondary institution, including those conducting internship or residency programs in health care facilities.

These costs must be reduced by any employer-provided educational benefits received  by the student, any non taxable distributions from a Coverdell ESA, any savings bond interest that was non taxable because it was used for education expenses, any non taxable scholarships or veteran’s education benefits.

Refer IRS publication 970 for more information.

IRS Tax Tip 2012-31: IRS Offers Four Tips on Unemployment Benefits

IRS Offers Four Tips on Unemployment Benefits 

Unemployment can be stressful enough without having to figure out the tax treatment of the unemployment benefits you receive.
Unemployment compensation generally includes, among other forms, state unemployment compensation benefits, but the tax implications depend on the type of program paying the benefits. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you receive in your total income for the year. You should receive a Form 1099-G, with the total unemployment compensation paid to you shown in box 1.

2. Other types of unemployment benefits include:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability payments from a government program paid as a substitute for unemployment compensation
• Trade readjustment allowances under the Trade Act of 1974
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act

For complete information on each of the benefits listed, see chapter 12 in IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and Nontaxable Income.

3. You must report benefits paid to you as an unemployed member of a union from regular union dues. However, if you contribute to a special union fund and your payments to the fund are not deductible, you only need to include in your income the unemployment benefits that exceed the amount of your contributions.

4. You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10 percent of your payment. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

For more information on unemployment compensation see IRS Publications 17 and 525.  Forms and publications can be downloaded from the IRS Website at www.irs.gov or can be ordered by calling 1-800-829-3676

For further explanation feel free to contact your Maxim Tax Representative.