What Is a Key Source of Information for Computing Employer Payroll Taxes?
The Internal Revenue Service is the statutory agency that administrates federal employment taxes. The employer is responsible for withholding payroll taxes from employees' paychecks, and for paying its own portion of payroll taxes. To help employers comply with its regulations, the IRS provides employers with a key source of information for computing payroll taxes.
Other People Are Reading
-
Types
-
The employer withholds federal income tax, Medicare tax and Social Security tax from an employee's paychecks. All employees are subject to these withholdings unless an employee is exempt. The employee can claim exempt from federal income tax withholding on her W-4 form. The IRS requires the employer alone to pay federal unemployment (FUTA) tax.
Main Source
-
The IRS sends each employer it has on file an updated version of its Circular E every year. The Circular E, also called the Employer's Tax Guide, is the key source of information for computing employer payroll taxes. The publication gives detailed information on when and how to deposit tax payments, and how to report tax liabilities. Federal income tax withholding is a particularly intricate process; it depends on the employee's filing status, income, and allowances. The Circular E explains how to perform this procedure. It also gives tax penalty information, such as the consequences for filing or paying employment taxes late.
-
Calculations
-
The Circular E has the all the federal tax rates the employer needs for compliance. The employer uses either the Circular E's wage bracket or percentage method and the employee's W-4 to figure federal income tax withholding. It computes Social Security tax at 6.2 percent of gross wages, up to the annual wage base of $106,800; and Medicare tax at 1.45 percent of all gross compensation. The employee and the employer pay equal portions of Social Security and Medicare taxes. The employer calculates federal unemployment tax at 6.2 percent of the first $7,000 paid to each employee. It can take the maximum credit of 5.4 percent against its FUTA taxes if it paid its state unemployment taxes on time. This lowers the FUTA rate to .8 percent.
State Resource
-
The state revenue agency administers state payroll taxes. Requirements vary by state, but most require the employer to withhold state income tax from employees' wages. In a few cases, city or local income tax may apply. The employer is often required to pay state unemployment tax. In rare cases, disability insurance or a job training tax may apply. The state revenue agency is the key source of information for calculating state payroll taxes. In most cases, the employer can access its rates via the agency's website.
Considerations
-
The IRS's Circular E is also helpful to employees. An employee can use it to determine how his employer arrived at the payroll tax calculations deducted from his paycheck. It also states the penalty for certain employee tax violations, such as a $500 penalty to those who submit a false W-4.
-
References
Resources
- Photo Credit Mark Weiss/Photodisc/Getty Images
