Becoming An Employer? Here's What You Need To Know About Payroll Taxes

Posted on: 4 April 2018


As an employer, one of your new responsibilities is the collection, remittance, and proper accounting for payroll taxes. What, exactly, are payroll taxes? And what do they mean for the employer? Here's a brief guide to get you up to speed.

The Basic Payroll Taxes

There are two basic forms of payroll taxes that are mandated by federal law. These are contributions to fund Social Security and Medicare, and they usually show up on employee paychecks as FICA (Federal Insurance Contributions Act) and MEDFICA. Your company as the employer will also be liable for an additional portion of these taxes as well as federal unemployment insurance. 

In some cases, you may have additional payroll taxes to collect for the state in which the employee earned wages. This is much less likely but may include things like state disability insurance contributions or unemployment coverage. 

Payroll Taxes and Income Taxes

Obligatory payroll taxes are not the same as income tax. Income tax is collected in the form of withholding (usually for state and federal taxes) and reconciled each spring in employees' personal income tax returns. Income tax withholding can be adjusted by the employee by completing a new Form W-4. Some employees may want a large amount withheld for income tax while others may have nothing withheld.

Payroll taxes, though, are not optional. They are withheld at a uniform rate of 6.2% for Social Security (on the first $128,400 earned) and 1.45% for Medicare contributions. Workers who are exempt from income taxes will still see this payroll tax deduction. 

Registering With Agencies

To collect and remit payroll taxes to the right places, you are required to register with the agencies that collect them. This is largely done by requesting an Employer Identification Number through the IRS. The IRS distributes income tax withholding, federal unemployment contributions, and payroll taxes to the appropriate federal agencies as you remit them according to a set schedule. 

As an employer, you will also have to remit to various state agencies. Talk with a small business bookkeeping service to determine with which agencies you must register to remit things like workers' compensation, unemployment insurance, and state withholding taxes. 

Tracking and Remitting Taxes

Finally, you are ready to begin collecting and remitting payroll taxes. Your bookkeeper will use payroll software to determine how much must be taken from employees' gross pay and remitted to these agencies. Each payroll tax withheld will be accounted for in a specific account in your company's financial books. 

You will need to remit the exact amount collected on a schedule determined by each agency. The IRS generally requires that you reconcile payments and amounts withheld once per quarter on Form 941 (small employers may be able to reconcile annually).  

Understanding and complying with your responsibility toward payroll taxes is vital to ensuring that your business stays out of trouble and thrives as an employer.