Payroll Tax Requirements
Each employer is required to perform payroll tasks, which include complying with payroll tax requirements. The Internal Revenue Service enforces the federal payroll tax standards that employers must adhere to. The state taxation/revenue agency administers the state payroll tax laws. In specific cases, additional regulations may apply.
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Withholding
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The IRS requires employers to withhold Medicare tax, Social Security tax and Medicare tax from employees' wages. The employer gives new employees a W-4 form to complete, which it uses along with the IRS withholding tax tables (Circular E) to figure federal income tax withholding. It withholds Medicare tax at 1.45 percent of all gross compensation; and Social Security tax at 6.2 percent, up to the annual wage limit of $106,800.
Most state revenue services require state income tax withholding. In many cases, the state requires the employer to use the employee's state withholding tax form and the state withholding tax tables to figure the tax. On occasion, city and local income tax apply, such as Ohio's school district tax and Yonkers city income tax. The employer can get the tax rates/guidelines for these taxes from the state revenue agency. In rare instances, such as in California, state disability insurance withholding is required. In this case, the employer uses the annual wage base and the tax rate the state sends it each year to compute the withholding.
Employer Taxes
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The IRS mandates employers to pay the same amount for Social Security and Medicare taxes as the employee. It requires the employer to pay federal unemployment tax at 6.2 percent of the first $7,000 paid to each employee. If the employer paid its state unemployment tax appropriately, the federal unemployment tax rate is .8 percent. The employers pays state unemployment tax according to the tax rate the state sends it each year and the state annual wage base. If state disability insurance or job training tax applies, the employer calculates them based on the state annual wage base and the rates the respective agency sends it each year.
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Payment/Filing
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To ensure compliance with federal payroll tax payment and filing, the employer should consult IRS Circular E for its payment and filing schedule. In most cases, the employer makes tax deposits at a financial institution authorized to accept federal tax deposits or via the Electronic Federal Tax Payment System, or EFTPS. Using the wrong payment method can result in fees from the IRS. The employer should contact its state revenue service for its guidelines on making state, city or local income tax payments and for tax filing procedures.
Considerations
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Staying abreast of payroll tax requirements can be time-consuming. To save time and reduce the risk of errors, the employer can outsource its payroll tax duties to a qualified third-party, such as a payroll service provider. It should, however, ensure the company does a proper job because the IRS penalizes the employer for payroll tax errors a third party makes.
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References
- Social Security Administration: Social Security and Medicare Tax Rates
- Arizona Department of Economic Security: Unemployment Insurance Tax Rates/Reimbursement Option Other Employment Taxes
- California Employment Development Department: Rates, Withholding Schedules, and Meals and Lodging Values
- IRS: Outsourcing Payroll Duties
- Ohio: Employer Withholding Taxes
- IRS: Circular E
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
