Pay Roll Taxes: Withholdings A to Z
Regardless of whether you hire a professional or do it yourself, you as a small business owner must have an idea of what you pay in payroll taxes to the local, state, and federal governments. Different government agencies will require different withholdings and each type of withholding tax is calculated differently. Letâ??s examine what they are.
Federal Income Tax Withholding: Regardless of whether pay is made in cash or otherwise, all payments made to an employee for services provided are taxable. Bonuses, vacation pay and some fringe benefits are also taxable. Expense reimbursement to employees on the other hand are non taxable (must be reported according to IRS rules). Employers are to withhold taxes, based on the employeesâ?? W-4 form or Allowance Certificate. The W-4 form bases withholdings on marital status and withholding allowances.
Social Security and Medicare Tax: Among other employee withholding is FICA (Federal Insurance Contributions Act), FICA uses federal funding to provide for the elderly; it is financed by the Social Security Tax. Medicare makes available health insurance; it is funded and reported under the Medicare Tax. The employee social security tax rate is 4.2%, the employerâ??s rate 6.2%. The Medicare Tax rate is 1.45% for employers and employees. The taxes are calculated on gross wages of the employee. Social Security has a maximum wage that is subject to tax (wage base limit), it set at $106,800. Social Security, Medicare and Federal Income Tax are all reported on form 941 on a quarterly basis; these taxes may be deposited daily, semi-weekly or monthly.
$100,000 Next Day Deposit Rule: Despite your deposit schedule, whenever you procure $100,000 or more in Federal Taxes; it must be deposited by the next banking day.
Federal Unemployment Tax (FUTA): The employer pays Federal Unemployment Tax and is not withheld from the employees. Many states also have an unemployment tax that must be paid. The federal unemployment rate is reduced if an employer also pays unemployment tax to a state. The unemployment tax is only calculated on the first $7,000 of an employees wages.
State Payroll Tax: Despite where an employee lives, employers are required to withhold taxes on employees working in that state. The various states have a form similar to the federal for W-4 that the employee must fill out. This form notifies the employer as to what rate of tax to withhold from the employees pay. This is paid and filed quarterly with the Department of Labor.
Local: Check with the city or town you do business in. Some towns collect taxes on the basis of the number of employees, or resident or non resident status. As an example, towns in New York, Philadelphia, Pennsylvania, Ohio, San Francisco; among others require local town taxes to be paid.
Though a majority of business owners outsource or hire an account to handle payroll taxes, you as the owner of the business must be aware of the inner workings of payroll taxes. After all, you are paying these taxes. Wouldnâ??t you want to know what you are paying for?