Payroll is more than just giving your employees their salary. There are tax responsibilities that entail the transaction. Moreover, there are multiple of those. While most of the payroll taxes are the employee’s responsibilities, a few require the employer to pay. To prevent tax or financial problems, every businessperson must understand their employer payroll tax responsibilities.
Federal Employer Payroll Taxes
Based on the federal regulation, there are two types of employer payroll tax responsibilities; FICA and FUTA. Each of them has different rules and intentions. Because it is the employer’s taxes, they should not deduct the funding from the employee’s salary. You have to allocate a separate budget for it.
Here are a brief explanation of each taxes along with the amount you are obliged to pay:
Stands for Federal Insurance Contribution Act, FICA tax consists of social security tax and medical tax. Both taxes are both employee and employer’s responsibilities. However, the benefit is solely for the employee.
Social Security Tax
The federal government uses the social security tax to provide benefits for retired people, disabled people, widows, and widowers. The tax is also known as OASDI, which stands for Old-Age, Survivorship, and Disability Insurance.
Employer security tax is 6.2% of the salary of each employee. The employees themselves pay the same amount of it, which is deducted from their salary. Hence, the federal receives 12.4% in total for the social security tax from one employee.
However, social security tax also has maximum taxable annual earnings of $137,700 in 2020 and $142,800 in 2021. Thus, the maximum social security tax an employer has to pay is $8,853.6 for each employee this year. If the employee earns more than that per year, the employer doesn’t need to spend more on this tax.
Medicare tax is clearly for health coverage. To be more specific, it is for Hospital Insurance. However, the tax is only one of a few sources for the Medicare cost. Unlike the social security tax, there is no minimum wage for the Medicare tax.
Both the employee and the employer have the same responsibility for this tax. Each of them should pay the same amount of it, which is 1.45% of each employee’s gross salary. Hence, the total amount the federal will receive would be 2.9% of the gross salary.
Besides the essential Medicare Tax from FICA, there is also an additional medicare tax, which you have to pay if your employee’s salary reaches a particular amount. The threshold is $200,000 for a single employee and $250,000 for married couples. However, this is the employee’s responsibility, not the employer’s.
Federal Unemployment Tax (FUTA)
Another of the employer payroll tax responsibilities to the federal government is the unemployment tax. When the employee leaves the company involuntarily, they will receive benefits from the federal government funded by this FUTA tax. Besides paying the tax, employers should also file an annual report of it.
As an employer, you have to pay FUTA tax to your employees, even the part-timers and contemporary workers. However, contractors and partners don’t fall under this category. The minimal amount of wage eligible for FUTA is $1,500 in any calendar quarter of a year. You also have to pay tax if the employee works for at least some part a day in 20 weeks.
The amount to pay is 6% for the first $7,000 of annual gross salary. You can get a maximum credit of 5.4%, which means you will have to pay the remaining 0.6%. To get this credit, you must meet the requirement below:
- Your company pays State Unemployment Tax (SUTA) in full and on time.
- Your state is not a credit-reduction state.
State Unemployment Tax (SUTA) can be different from one state to another. As for your business in Virginia, there are four brackets for the income tax, ranging from 2% to 5.75%. However, the state tax doesn’t require the employer to pay. Instead, they withhold it from the employee’s salary. Virginia is also not a credit-reduction state.
Reporting Payroll Taxes
Besides paying the taxes in full and on-time, every employer also must file a report on it. The report is not only about the gross salary payment and the employer payroll tax. Instead, all the taxes your employees pay from their payroll also needs to be on your report.
While many people find this task frustrating, you can make this process easier by understanding what to do. Here is the step-by-step guideline about how to report your payroll taxes.
Prepare all the data you will need for the report, such as:
- Form W-4 customized for each employee based on their status.
- Pay schedule
- A list of total hours worked by each employee.
- A list of all the employee’s gross salary
- Calculate how much money you have to pay as the employer.
- Calculate how much money you need to deduct or withhold from your employee’s salary to pay their share of tax on their behalf. You can use the IRS Withholding Calculator to help you in this process.
- Calculate other deduction amounts, such as retirement plan contributions.
- File Form 941. It is a quarterly report for your overall payroll tax liability and payment from the last quarter.
- File Form 940. It is an annual report for your overall unemployment tax liability and payment for the whole year.
- File Form 944. It is the annual federal tax return for the employer.
- File state tax reports. Each state may have different regulations and timelines. For Virginia, the filing deadline is May 1st.
Knowing your employer payroll tax responsibilities is crucial to plan your budget well. Failing to do so may affect the financial balance in your business. The more employees you hire, the more significant the amount will be.
Besides paying and reporting it, you also need to make sure that the transaction is noted on your company’s financial ledger. If your company has no bookkeeper to handle such a thing, feel free to try our virtual bookkeeping service, NumberSquad.