Tax Blog

What are Payroll Taxes?

You’ve onboarded your first sales team.

It’s a group of talented reps who’ve got the experience and skills to improve your bottom line.

A couple of weeks pass, and things are looking up. Performance charts show an upward trajectory.

Now you need to make sure the reps are compensated for their hard work.

In addition, you need to withhold a certain amount from their wages to file payroll taxes.

There’s no other way around it.

When you launch a recruitment drive, collection and other intricacies of payroll aren’t probably the first thing that hits your mind. But it’s a major part of the administrator and financial side of running a business.

Failure to make proper payroll deposits or withholdings can lead to significant penalties and fines for a company.

To make sure you are compliant and your staff is happy, let us help you develop a proper understanding of how payroll taxes work and how you can stay on top of them during the financial year.

How Payroll Taxes Work?

Payroll taxes are used to fund programs like unemployment insurance, social security, and Medicare. Depending on the location of your company, they may also include city and state taxes.

Before filing payroll taxes with the government, you’ll need to get your company registered with the federal government and obtain an EIN (employee identification number).

EIN is sort of a social security number for your company and is used for all your communications, returns, deposits, and other correspondence.

When a company pays its staff, the employer is tasked with the responsibility to withhold the right sum from their personnel’s paycheck. The money withheld is determined by salary figure, the federal income tax tables, and the exemptions mentioned by the worker on the W-4 form.

In addition to federal taxes, you also need to pay FICA (Federal Insurance Contribution Act) duties, which fund the Social Security and Medicare programs.

Breakdown of FICA Payroll Taxes

Social Security accounts for 50% of FICA. The rate for 2019 is 12.4%, half of which needs to be withheld and paid by the employer. The sum is paid for anything earned up to an annual wage of $132,900.

Medicare comprises of the other 50% of FICA taxes. Employers are required to withhold 1.45% of each worker’s income for the Medicare tax. The withheld amounts also need to be reported to the IRS.

In addition to FICA taxes mentioned above, companies must deposit an unemployment tax for each employee who works at their company. This comes under the category of FUTA (Federal Unemployment Tax Act). FUTA accommodates unemployment compensation benefits that individuals get when they’re no longer employed.

For 2019, the FUTA tax rate is 6%, and it’s applicable on the first $7,000 paid in salary to personnel during the year.

Besides FICA, you may also need to file state and local payroll taxes.

Breakdown of State and Local Payroll Taxes

Some states require companies to pay a “state income tax.” Others don’t. However, all states have a SUTA (State Unemployment Tax Act) that varies by state.

Additional taxes vary by company proximity and may cover sick leave payments, accidental insurance, disabilities, and more.

State-based income tax isn’t levied in South Dakota, Texas, Wyoming, Washington, Alaska, Nevada, and Florida, while New Hampshire and Tennessee require employers to pay interest income and tax dividends.

In all of the other states, employers need to withhold local and state income taxes from salaries regardless of the earned figure.

When it comes to SUTA, the tax percentage varies between 1 and 3.7%. Employers who have good record of SUTA payments may also be eligible for a credit that reduces their tax liability. In 2019, only employers from the U.S. Virgin Islands with a good SUTA payment record can apply for a credit reduction.

When Are Payroll Taxes Due?

Generally, you’ll need to make payroll deposits throughout the year, as well as report the taxes on the appropriate forms.

For FICA and federal income taxes, you’ll need to complete Form 941 and submit it quarterly on the last day of the month following the completion of the quarter.

For the first quarter, it was due on April 30. For the current one, you have until July 31 to file a report.

The actual tax can be paid on the EFTPS (The Electronic Tax Payment System).

FUTA taxes, too, have a quarterly deadline. You need to fill out the Form 940 and report on April 30, July 31, October 31, and January 31 (similar to Form 941).

Like FICA taxes, the amount for FUTA also needs to be paid via EFTPS.

If you’re going to file SUTAs, you’ll also need to file wage detail reports at the end of each quarter.

What Happens If You Miss the Payroll Tax Deadline?

Failure to meet the deadline for payroll tax deposit or form filing can result in severe penalties, monetary fines, and in worst cases, criminal acts.

Because the federal government offers complete support to the Internal Revenue Agency for payroll collection, the IRS has more power and can even take extreme action against companies who fail to comply.

Even if you miss just one report, they can hold you personally responsible for the missed or unreported payroll taxes.

Whether you didn’t have the funds or you simply forgot the deadline, the IRS doesn’t care. They can and would levy fines and penalties. And it’s only a matter of time before they’ll come after your personal assets and business.

If any of this sounds familiar, you’ve probably been fined in the past. Fortunately, you can avoid some of this through the assistance of a payroll tax relief lawyer.

Instead of waiting until you receive a letter of threat from IRS, schedule a consultation with our tax resolution professionals to negotiate to a better arrangement that may reduce your penalties or bring the collection action to a halt.

Combine tax relief assistance with adequate knowledge of how payroll taxes work, and you’ll never be questioned over payroll compliance in the future.