Navigating Payroll Taxes: What Employers Need to Know

Payroll taxes are levied on the wages, salaries, and other forms of compensation employers pay their employees. The employer typically withholds the tax from the employee’s paycheck and remits this to the government regularly.

Payroll taxes finance government programs and services like Social Security, Medicare, and unemployment insurance. Comprising 24.8% of federal, state, and local government revenue, they are the second largest source of combined tax revenue in the United States.

Income Tax, Payroll Tax: What’s the Difference?

Payroll and income taxes are the most common types of employment taxes, but they’re not the same thing. They differ in what they fund, who pays them, and how to assess them.

Read More: Should I Outsource Payroll? Yes—And Here’s Why



3 Things Employers Should Know About Payroll Tax Management

Paying careful attention to payroll taxes is crucial to maintaining your workforce, avoiding stiff penalties, protecting your reputation, and keeping your business open. It directly impacts your business’s financial health and compliance with legal obligations. Here are a few things employers should know about payroll tax management:

There Are Different Types and Rates

As an employer, it’s your duty to collect, report, and remit your share of payroll taxes and the portion owed by your employees. Before you can do that effectively, you need to know the different types of taxes and their corresponding rates:

Federal Payroll Taxes

Federal Insurance Contribution Act (FICA)

The two main federal payroll taxes are known as the FICA, and it encompasses two parts:

• Social Security. Part of the FICA tax funds the Social Security program. Social Security provides financial support to eligible individuals, including retirees, disabled individuals, and survivors of deceased workers. Employees and employers share in the Social Security tax, each paying 6.2% of the employee’s taxable gross income until the employee reaches the wage base limit of $160,200.

• Medicare. Another portion of the FICA tax finances the Medicare program. Medicare provides healthcare coverage to eligible individuals, primarily aged 65 and older, and specific individuals with disabilities. Medicare helps cover medical expenses, including hospital care and medical services. Medicare tax is also split evenly between the employees and employers, each paying 1.45% of the employee’s taxable gross income. Employees who earn more than $200,000 annually may have to pay the Additional Medicare Tax of 0.9%, but their employers aren’t required to match this.

Federal Unemployment Tax (FUTA)

The FUTA funds unemployment benefits for eligible individuals who have lost their jobs. The employers alone pay this tax and do not withhold it from their employees' wages. The FUTA rate is 6% on the first $7,000 that each employee earns. Employers may receive a credit against the FUTA tax if they pay state unemployment taxes.

State and Local Payroll Taxes

In the U.S., individual state and municipal governments may impose additional payroll taxes on employees and employers. These are separate from federal payroll taxes and finance state and local programs and services. 

For example, the state of California has four state payroll taxes:

Your business’s payroll taxes will depend on which state, county, and city your business operates. Because payroll taxation is highly localized, managing it yourself can be very complex, increasing the risk of fines and penalties. This is why companies operating in multiple states or localities prefer outsourcing their payroll tax management to tried-and-tested payroll specialists. 

Read More: Everything You Need to Know About HR Outsourcing 

There Are Deadlines

Every employer needs to remit payroll taxes on time and in full. While that may sound straightforward, different tax types have varying deadlines, which you must keep track of and adhere to. 

According to the U.S. Internal Revenue Service (IRS), an employer’s deposit schedule for Social Security, Medicare, and federal income taxes is determined from the total taxes reported on Forms 941, line 12, in a four-quarter lookback period. The lookback period begins July 1 and ends June 30.

If you reported $50,000 or less of taxes for the lookback period, you’re a monthly schedule depositor. If you reported more than $50,000, you’re a semiweekly schedule depositor.

However, new employers’ tax liability for any quarter in the lookback period before they started or acquired their business is considered to be zero. Therefore, they're automatically a monthly schedule depositor for the first calendar year of your business.

• Monthly. Employers reporting a tax liability of $50,000 or less for the lookback period deposit monthly, and they are due on the 15th day of the following month.

• Semiweekly. Employers reporting a tax liability of more than $50,000 for the lookback period deposit semi-weekly. For payments made from Wednesday to Friday, the deposits are due by the following Wednesday. For payments from Saturday to Tuesday, the deposits are due by the following Friday.

FUTA tax runs on a different schedule. Employers pay this every quarter, due one month after each quarter (i.e., January 31, April 30, July 31, and October 31).

State and local payroll taxes have varying due dates as well. Visit your state or local Department of Labor websites for information on due dates and deadlines.

There Are Penalties

The U.S. government expects employers to take payroll tax compliance seriously and meet their obligations accurately and on time. If you fail to do this, the federal, state, and local tax authorities could impose monetary fines and legal penalties against your business.

If you don’t make payroll tax deposits on time, in the right amount, or in the right way, the IRS charges a Failure to Deposit Penalty, calculating it based on the number of days your deposit is late:

If you fail to file the required payroll tax-related forms and reports, fail to pay the employer portion of payroll taxes, willfully fail to collect or pay them, or intentionally evade paying them, you can face penalties, fines, and even imprisonment.

Your Payroll Taxes: On Point and On Time with Nexus HR

Payroll tax management is a complex and time-consuming process. It requires highly specialized knowledge that makes it challenging to navigate, especially for business leaders who need to manage other areas of operations. 

Due to payroll tax management's complexity and potential consequences, many employers entrust it to professional payroll service providers who leverage technology and expertise to automate and streamline the process. These solutions can help mitigate the administrative burden and reduce the risk of errors and non-compliance.

By partnering with trusted tax professionals, your business can get valuable insight and guidance that ensure accurate and efficient tax management. Free up your time and resources,  focus on growing your business, and leave your payroll taxes to the experts at Nexus HR.