The Guide to Payroll Taxes for Small Business

Payroll taxes are a crucial part of any business that employs staff. Understanding what they are and how they work is essential for small business owners to ensure they are in compliance with the law and avoid penalties. In this article, we will discuss the basics of payroll taxes, including what they are and the most common types of payroll taxes.

What are Payroll Taxes?

Payroll taxes are a form of taxation that is collected from both the employer and employee. The taxes are calculated based on an employee's gross pay and are withheld by the employer from each paycheck. The employer is then responsible for remitting the taxes to the government on behalf of their employees.

In addition to federal payroll taxes, many states and localities also require employers to withhold state and local taxes from employee paychecks. These taxes are used to fund various state and local programs, such as education, healthcare, and infrastructure.

Other types of payroll taxes that employers may be responsible for include unemployment taxes, workers' compensation taxes, and disability taxes. These taxes are used to provide benefits to employees who are injured on the job or become unemployed.

Understanding Taxable Employees

A taxable employee is an individual who is classified as an employee according to the Internal Revenue Service (IRS) and is therefore subject to payroll taxes. These taxes include federal income tax, Social Security tax, and Medicare tax, among others. Employers are responsible for withholding and remitting these taxes on behalf of their taxable employees.

Taxable employees include full-time, part-time, and temporary workers who receive a salary, wages, or other compensation for their work. This includes individuals who are hired on a seasonal basis, such as during the holidays or tax season. The IRS provides specific guidelines for determining whether an individual is considered an employee or an independent contractor.

Independent contractors, on the other hand, are not considered taxable employees. They are responsible for paying their own taxes, and the company that hires them is not responsible for withholding or remitting taxes on their behalf. Independent contractors are typically hired for a specific project or a set period and have more autonomy in how they complete their work.

Employer Tax Obligations: What Taxes Do Employers Need to Pay?

Employers are responsible for paying and withholding several types of taxes related to their employees. One of the most common taxes is federal income tax, which employers must withhold from their employees' paychecks and submit to the Internal Revenue Service (IRS) on their behalf.

In addition to federal income tax, employers are also responsible for paying and withholding Social Security tax and Medicare tax. These taxes are based on a percentage of the employee's gross pay, and the employer must pay a portion of these taxes while withholding the employee's portion from their paycheck.

Another tax that employers are required to pay is the Federal Unemployment Tax Act (FUTA ), which is a tax on wages paid to employees. The FUTA tax is used to fund state unemployment programs, and employers are responsible for paying this tax on behalf of their employees.

State Unemployment Insurance Tax (SUI) is another type of tax that varies by state, and employers are responsible for paying this tax to their state government. This tax is used to provide benefits to employees who become unemployed.

In addition to these federal taxes, employers may also be responsible for paying state and local taxes, such as disability insurance and workers' compensation taxes. These taxes vary by state and locality, and it's essential for small business owners to stay informed about the specific taxes they are responsible for in their state and to ensure they are paying the appropriate amounts to the government on behalf of their employees.

A Guide to Calculating Payroll Taxes for Small Businesses

Step 1: Determine the employee's gross pay.

The first step in calculating payroll taxes is to determine the employee's gross pay, which is the total amount of money the employee earns before any taxes or deductions are taken out.

Step 2: Calculate federal income tax withholding.

Federal income tax withholding can be calculated using the IRS Circular E, which provides a tax withholding table. Alternatively, employers can use the employee's W-4 form to determine the appropriate amount of federal income tax to withhold.

Step 3: Calculate Social Security and Medicare taxes.

Social Security and Medicare taxes are a combined total of 7.65% of the employee's gross pay and are split between the employee and employer. Employers are responsible for withholding the employee's portion of these taxes from their paycheck and paying the employer's portion.

Step 4: Calculate state and local taxes.

State and local taxes will vary depending on the state and the employee's income. Small business owners should consult with their state's tax authority or a tax professional to determine the specific state and local taxes they are responsible for.

Step 5: Calculate other taxes.

In addition to federal, Social Security, Medicare, and state and local taxes, small business owners may also be responsible for other taxes, such as unemployment insurance or disability taxes. These taxes vary by state and can be determined by consulting with the state's tax authority or a tax professional.

Applicable Tax Credits

There are several tax credits that small business owners may be eligible for to help reduce their payroll taxes. These include:

Employee Retention Credit : A tax credit available to eligible employers that retain their employees during the COVID-19 pandemic.

Paid Leave Credit : A tax credit available to employers who provide paid leave to employees who are unable to work or telework due to certain COVID-19 related reasons.

Hiring Incentives to Restore Employment (HIRE) Act: A tax credit available to employers who hire workers who have been unemployed for at least 60 days.

How to Withhold Payroll Taxes for Small Businesses

Step 1: Obtain an Employer Identification Number (EIN)

Small business owners need to obtain an EIN from the IRS before they can begin withholding payroll taxes. The EIN is a unique identifier that is assigned to each business for tax purposes.

Step 2: Determine federal income tax withholding

Small business owners must determine the amount of federal income tax to be withheld from each employee's paycheck. This can be done by using the IRS's Circular E, Employer's Tax Guide, or by using the employee's W-4 form.

Step 3: Determine Social Security and Medicare tax withholding

Small business owners must also determine the amount of Social Security and Medicare taxes to be withheld from each employee's paycheck. The employee's Form W-4 can be used to calculate these taxes.

Step 4: Determine state and local tax withholding

State and local tax withholding requirements will vary depending on the state in which the small business is located. Small business owners should consult with their state's tax authority to determine the specific state and local taxes they are responsible for.

Step 5: Deposit payroll taxes with the government

Small business owners are required to deposit payroll taxes with the government on a regular basis. The frequency of the deposits will depend on the amount of taxes owed. Federal income taxes and Social Security and Medicare taxes are generally required to be deposited on a monthly or semi-weekly schedule.

Forms Associated with Payroll Taxes

Form W-4

• This form is used by employees to provide their employer with their personal information and tax withholding information.

Form W-2

• This form is used by employers to report employee wages and taxes withheld for the year to the Social Security Administration.

Form 940

• This form is used by employers to report Federal Unemployment Tax Act (FUTA) taxes paid to the IRS.

Form 941

• This form is used by employers to report employee wages and taxes withheld for federal income taxes, Social Security, and Medicare taxes on a quarterly basis to the IRS.