Employer payroll taxes are federal taxes that businesses must pay for each of their employees. The employer payroll tax is made up of four components: Social Security tax, Medicare tax, federal unemployment tax, and state unemployment tax.
Employees must also pay Social Security, Medicare, and income taxes. Employers are responsible for withholding these taxes from employees’ paychecks.
The Components of Employer Payroll Taxes
There are four different payroll taxes that employers are required to pay for each employee.
Social Security tax
The federal Social Security tax is 12.4% of an employee’s base wage up to $147,000. The employer and employee split this tax, so each is responsible for paying 6.2%. Employers are required to withhold employees’ Social Security taxes from their paychecks.
The Medicare tax is 2.9% of an employee’s base wage with no limit. The employer and employee split this tax as well, so each is responsible for paying 1.45%. Employers are required to withhold employees’ Medicare taxes from their paychecks.
In addition, employees who have a base wage of more than $200,000 must pay an additional Medicare tax of 0.9%. Employers are not responsible for paying any of this tax, but, like several other payroll taxes explained below, they are responsible for withholding it from an employee’s paycheck.
Federal unemployment tax
The federal unemployment tax is 6% of the first $7,000 an employer pays to an employee each year. It is paid only by the employer.
State unemployment tax
State unemployment taxes vary from state to state. They are paid only by the employer in most states, but several states also require employees to pay unemployment taxes.
Withholding Payroll Taxes
The employer portion of payroll taxes is not withheld from an employee’s earnings. Rather, they are paid directly by the company. However, employers are also responsible for withholding the employee portion of Social Security and Medicare taxes, as well as employee income taxes, from employees’ paychecks.
Figuring out how much to withhold from an employee’s paycheck for payroll taxes is relatively easy. In states that don’t require employees to pay state unemployment taxes, the employee portion of payroll taxes is 7.65% of their base wage (the sum of Social Security and Medicare taxes).
Determining how much to withhold in income taxes is more complex. Employees must fill out a W-4 form, which tells employers how much to withhold based on their base wage and any anticipated tax credits and deductions. The W-4 form explains how to calculate income tax withholdings for each employee based on current income tax rates.
Note that some employees may also choose to make voluntary deductions from their paychecks. These deductions could include payments towards health or life insurance premiums for employer-sponsored plans or contributions towards an employer-sponsored retirement plan like a 401(k). These deductions are not taxes, but rather optional payments that employees can choose to make depending on the benefits their employer offers.
Paying Employer Payroll Taxes
Companies are responsible for paying employer payroll taxes and withheld employee taxes to the IRS on a monthly or semi-weekly basis, while payment schedules for state taxes vary by state. Most payroll software platforms are designed to facilitate these payments.
In addition, businesses must submit several payroll tax forms to the IRS. Form 941 must be filed quarterly, while Forms 940 and 945 must be submitted annually. Employers must also submit a W-2 form for every employee each year.
If your business fails to submit payroll taxes or these tax forms on time, there are penalties to pay. Penalties for late submission of Forms 940 and 945 can range up to 15% of the annual total your business owes in federal payroll taxes.
Employer payroll taxes include Social Security, Medicare, federal unemployment, and state unemployment taxes. Employers are also responsible for withholding and submitting social security, Medicare, and income taxes on behalf of employees. It’s important to stay on top of payroll taxes, since the IRS has significant penalties for businesses that submit taxes or required forms late.
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