A critical part of payroll is payroll taxes. The employer is responsible for withholding all payroll tax from his employees’ paychecks. Failure to withhold these taxes results in fines from the government, which can be hefty. The employer is required to pay the employees’ taxes to the government in a timely manner. Payroll taxes are generally withheld during the payroll processing for each pay date. If you are using payroll software, simply enter the employee’s tax information and the system will compute them.
Withholding Payroll Taxes
Have all employees complete a Federal (W4) tax form. The employee should include how many exemptions he is claiming on his W4. Consult the IRS Withholding Table (Circular E) for the amount of taxes to be withheld from his gross (before taxes) pay. This amount is highly dependent on his number of exemptions, filing status and income.
Deduct state income taxes based on the employees’ completed state tax form. State tax laws vary by state; therefore, the amount due depends on the state’s laws, and the employee’s filing status and dependent amount. Most states require state taxes to be withheld from the employees’ paycheck; however, a few states, such as Florida do not impose state income taxes. Some states also charge school, county and/or district taxes. Check with your states’ department of labor to determine your state tax laws.
Deduct Social Security taxes. Social Security is comprised of the Federal Insurance Contribution Act (FICA) and Medicare. For FICA taxes, 6.2 percent applies to all employees’ earnings up to the annual maximum. For 2009, the maximum is $106,800. Once the employee has met the maximum in FICA taxes, no more deductions need to be taken out for that year. For medicare, 1.45 percent applies to all wages paid to the employee. There is no limit on medicare taxes.
Ensure the employee completes and signs new tax forms if he would like to change his tax information (e.g. dependent amount). Always keep a copy of the change filed in a secure area in case the employee questions the change after it is processed.
Double-check the employees’ W2s at year-end. All employee payroll taxes withheld during the year should be reflected on the W2 accordingly. If there is a discrepancy, try to detect it and correct the W2 before the employee files her taxes to avoid further complications. To reduce W2 errors, after processing each payroll throughout the year, print payroll tax reports or double-check the employees’ check stubs to ensure the correct taxes has been deducted.