One of the issues business owners have to deal with is staying on top of the many obligations for local, state, and federal taxes. Since they bear the ultimate responsibility for fulfilling all tax obligations, understanding the tax system together with payroll tax payments and requirements is a must for every employer.
In addition to making federal payroll tax payments to the government, filing the proper reporting and information returns, providing employees and independent contractors with Form W-2 and 1099, employers need to comply with state requirements as well.
The rules for payroll tax payments can be complex, but penalties for noncompliance are severe, which is why businesses need to take necessary measures when it comes to handling the administration of payroll tax responsibilities.
Payroll Tax Obligations
All businesses with employees have to withhold payroll taxes and to pay applicable federal, state, and local taxes. Failing to do so may result in heavy fines and penalties, so employers need to pay special attention to calculating the amount of taxes and making timely payroll tax payments.
The taxes usually withheld from employee paychecks include the Federal Insurance Contributions Act (FICA) and federal, state, and local income taxes, if applicable. Other withholding obligations include the Federal Unemployment Tax Act (FUTA) and, in states such as California, Hawaii, New Jersey, New York, and Rhode Island, disability insurance taxes.
To ensure proper handling of payroll tax obligations, employers have to:
- Pay and report federal and state taxes to the appropriate tax agencies,
- Properly report income, amounts withheld, and amounts paid on behalf of employees and contractors, and
- Maintain the required federal and state records.
Mandatory Payroll Tax Payments
There are a variety of payroll tax payments, some paid by employers, some by employees, and some by both. But in all cases, it is the employers’ obligation to deposit them.
Federal Income Tax Deposits
Income tax withholding is designed to cover what employees will owe in federal income tax for the year. This includes employees’ income taxes as well as Social Security and Medicare taxes. For certain employees, it also includes an additional Medicare tax.
Federal tax deposits have to be made electronically, and there are four ways an employer can use to electronically transmit tax payments:
- Use the Treasury Department’s free Electronic Federal Tax Payment System (EFTPS).
- Asking a financial institution to initiate an ACH Credit payment on an employer’s behalf.
- Requiring a trusted third party, such as a tax professional or payroll service, to make the payment on an employer’s behalf.
- In extraordinary circumstances, employers can ask a financial institution to make a same-day tax wire payment.
FICA Tax Deposits
Social Security and Medicare taxes, which make up FICA, are imposed on both employers and employees to pay for Social Security benefits and Medicare benefits.
The deposit schedule for FICA taxes depends upon the size of employment tax liability. Generally, toward the end of each year, the IRS provides employers with a method they should use during the upcoming calendar year. There are four possible options:
- Annually – Small businesses may be able to file Form 944 Employer’s Annual Federal Tax Return and remit the taxes with that return. However, they need to request permission from the IRS before filing an annual return.
- Quarterly – In case employment taxes for either the current quarter or the preceding quarter are less than $2,500, employers can remit the taxes with Form 941 Employer’s Quarterly Federal Tax Return.
- Monthly – Under this type of depositing, employers need to deposit the taxes that they are required to withhold or pay on wages paid during a calendar month by the 15th day of the following month. For example, amounts withheld or paid on March wages, have to be deposited by April 15th.
- Semi-weekly – Under this depositing, employers have to deposit the taxes associated with wages paid on Wednesday, Thursday, or Friday by the following Wednesday. They also need to deposit the taxes associated with wages paid on Saturday, Sunday, Monday, or Tuesday by the following Friday.
If total taxes for the quarter are $2,500 or more, employers can be on either a monthly or semiweekly schedule. The IRS determines a payment schedule based upon the amount of income and FICA taxes reported during a specified look-back period. For each calendar year, the look-back period is the four-quarter period ending on June 30 of the prior year.
If employers reported $50,000 or less in taxes during the look-back period, they deposit on a monthly basis. Otherwise, they deposit on a semiweekly basis. However, all new employers have to deposit their employment taxes monthly for their first calendar year.Payroll taxes can be complex enough even without the updated regulations and forms. Learn more about the IRS instructions for reporting of deferral and repayment of Social Security tax and ensure compliance with changing tax regulations.
FUTA Tax Deposit Rules
Since the federal government does not pay unemployment benefits, it helps states pay them to employees who have been involuntarily terminated from their jobs. FUTA, a tax created by the Federal Unemployment Tax Act, is used to fund this assistance to the states.
Generally, employers have to deposit federal unemployment taxes on a quarterly basis. However, if their quarterly FUTA tax liability is $500 or less, they may carry it forward and add it to FUTA liability for the next quarter. If employers’ liability for the last quarter of the year is $500 or less, they have the option of either depositing the tax or remitting it with their annual return.
If quarterly FUTA tax liability is more than $500, employers have to make quarterly FUTA deposits by the last day of the month that follows the end of each quarter.
State Payroll Tax Payments
States have the responsibility of paying unemployment benefits to eligible workers who are involuntarily terminated. To fund this liability, states impose unemployment tax on employers. They generally have to make tax payments for two types of state payroll taxes: income taxes and unemployment taxes.
Each state requires employers to file a quarterly tax and wage report on or before the last day of the month following the calendar quarter. Also, some states require electronic filing for certain returns and payments. Therefore, employers have to consult their state department of revenue and state unemployment tax agency before making state payroll tax payments.
Maintaining Payroll Tax Payments and Avoiding Penalties
The biggest risk employers can face when administering payroll tax payments is that they can be held personally liable for all income and FICA taxes that they willfully either fail to withhold or fail to pay to the IRS and your state tax agencies. Even if they avoid this type of penalty, they could face serious repercussions if their failure to withhold was to your misclassification of an employee as an independent contractor. Also, there are both criminal and civil penalties for failing to timely file payroll tax returns or to timely deposit taxes employers owe.
As making payroll tax payments may seem overwhelming to employers, they can consider outsourcing payroll tax management. This approach simplifies the entire process and removes the burden of sending out reports and payroll tax payments when they are due, for both federal and state taxes. Therefore, instead of worrying about calculations, preparation, and making payroll tax payments on time, employers can avoid potential pitfalls and make sure they are compliant with different tax rules and regulations.Remove the burden of doing calculations, filling out forms, or making payroll deposits by using the right employment tax software, and ensure constant compliance with changing tax regulations.