What Taxes Does The Employer Pay Employer Taxes Explained
When you look at your paycheck, you probably notice a percentage of taxes taken out of your paycheck. Yes, your employer pays for some, but the employee has some responsibility too. Employers handle the administrative responsibility for the payment of taxes, whether by paying or having it deducted from your paycheck. Still, in some cases, they also handle paying certain taxes. Lets explore how payroll taxes work and what the employer versus the employee is responsible for when it comes to paying.
What Payroll Taxes Do Employers Pay
Payroll taxes are one part of what the IRS considers as employment taxes. The term employment taxes actually refers to a variety of taxes that are directly connected to your employees. These taxes include:
- Federal and state income taxes
- Federal Insurance Contribution Act taxes
- Federal Unemployment Tax Act taxes
- Additional Medicare tax
- Self-employment tax
While some people confuse payroll taxes with income tax, the term payroll taxes specifically refers to FICA taxes. These FICA taxes are made up of a combination of Social Security and Medicare taxes, both of which are deducted from employee paychecks to fund their respective programs. Altogether, FICA taxes account for a total flat rate of 7.65 percent thats split between Social Security and Medicare.
These taxes are deducted from employee paychecks, but employees arent the only people who contribute these percentages to Social Security and Medicare. Both employees and employers are responsible for paying them, and the employer payroll tax percentage is the same as what employees owe. As such, your business needs to match the flat percentage deducted from each paycheck.
Federal Employment Tax Due Dates
If you determine your business needs to be on a monthly deposit schedule, youll need to deposit your employment payroll taxes by the 15th of the following month for which theyre due. Semiweekly schedules require that taxes for wages paid Wednesday, Thursday, or Friday be made by the following Wednesday. For wages paid on other days of the week, tax payments should be made by the following Friday.
Semiweekly Deposit Schedule
|Saturday, Sunday, Monday, and/or Tuesday
One important thing to note is that if you accumulate $100,000 or more in taxes, regardless of your deposit schedule, you must deposit the taxes by the next business day.
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Overview Of Tax Returns And Deposits
Employers have the responsibility to file employment-related tax returns and deposit employment taxes according to set deadlines. If they fail to do so, they may be subject to failure to file and failure to pay penalties. What’s more, “responsible persons” in the company who fail to deposit trust fund taxesâamounts withheld from employees’ paychecksâmay be subject to a 100% personal liability. This trust fund recovery penalty is triggered when a person with the authority to make payment decisions willfully fails to deposit the taxes. The possibility of these penalties means employers must get things right.
Employer Contributions To Pension Plans
Some companies provide pensions for their employees. This means their employees will receive ongoing monthly payments after they retire from the company. The matching principle requires that the cost of the benefit should be recognized during the years that the employees are working , and not when the employee is retired.
Note: In effect, pensions are part of the compensation package given to employees working at a company. While some parts of the compensation package are paid out during the time the employee is working, other benefits are deferred until the employee is retired. The cost of the entire compensation package, however, must be expensed or assigned to products manufactured when the employee is working, so that the cost of the employee’s work is matched with the revenue resulting from the employee’s work.
The concept is that in the years that the employee works, the company will charge Pension Expense and will credit either Pension Payable or Cash. For more specifics on pensions, you are referred to an Intermediate Accounting text or to the Financial Accounting Standards Board’s website www.fasb.org.
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Payroll Taxes Fall Into One Of Three Categories:
- Taxes you pay as an employer, which include federal and state-level unemployment taxes
- Taxes you deduct on behalf of your employees , particularly to pay federal and state income tax
- Taxes youre both responsible for, including contributions to Medicare and Social Security
What youll actually need to pay depends on a number of different factors including your business type,size, and location so be sure to check with a tax professional who can tell you whats relevant for yourparticular business.
Changes To Irs Form W
Prior to the enactment in 2017 of the federal Tax Cuts and Jobs Act , most withholding allowances were based on personal exemptions, including those for the employee, spouse and any dependents. The TCJA made significant changes to tax rates, deductions, tax credits and withholding calculations, and changed the value of personal exemptions to zero.
As of January 1, 2020, IRS Form W-4 has been revised to reflect changes resulting from the TCJA where the withholding calculation is no longer tied to the number of personal exemptions claimed.
The TCJA did not impact Massachusetts laws regarding exemptions. To accurately determine the correct amount of Massachusetts withholding, employers will rely on Massachusetts Form M-4.
New employees are expected to complete both Form W-4 and Form M-4 for employers. It is not necessary for current employees to resubmit the federal Form W-4 unless they choose to adjust their withholding amounts. Employees who choose to make adjustments will submit both Form W-4 and Form M-4 to the employer.
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State And Local Payroll Tax
Employers are also responsible for paying state and local payroll tax on behalf of employees.
As with federal payroll tax, part of this tax is employer-paid, and part is employee-paid. Keep in mind that âemployee-paidâ just means that you, the employer, withhold a certain amount from your employeeâs paycheck and then remit it as part of your payroll taxes.
In addition to state payroll tax , employers are also responsible for remitting state income tax on behalf of their employees.
State and local payroll taxes are governed at the state and local levels, and payroll tax rates and rules vary by jurisdiction. To find out more about payroll tax in your state and local area, check out the Federation of Tax Administratorsâ list of each stateâs taxing authority.
State Payroll Tax Rates
Some states have an income tax others dont. The two states that tax investment income but do not assess personal income taxes are Tennessee and New Hampshire. However, all states have state unemployment taxes.
Check out our state payroll directory for specific state-by-state payroll tax rate information. Youll find whether your state has an income tax and any local taxes.
The percentage of State Unemployment Tax varies by state. Each state determines the wage base or minimum earnings required for SUTA to be deducted. Others may refer to it as unemployment insurance .
Also, the SUTA rates are affected by an employers specific unemployment history and industry. Besides, some states assign a generic new employer rate that may be higher or lower than what the employer will pay once it has been in business for a period of time, and each state determines the time frame. For example, if one employer has higher unemployment claims than another, that employer will pay a higher unemployment rate.
Below, are the most common state taxes that employers need to be aware of:
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Statutory Payroll Tax Deductions
The law requires that payroll taxes must be withheld from an employee’s paycheck each pay period. Employers must then transmit these withholdings to various tax agencies. Payroll tax deductions include the following:
- Federal income tax withholding based on the withholding tables in Publication 15
- Social Security tax withholding of 6.2% in 2021 and 2022, up to the annual maximum taxable earnings or wage base of $142,800 for 2021 and $147,000 for 2022
- Medicare tax withholding of 1.45%
- Additional Medicare tax withholding of 0.9% for employees earning over $200,000 for single taxpayers, $125,000 for married filing separate, and $250,000 for married filing jointly.
- State income tax withholding
- Various local tax withholdings, such as city, county, or school district taxes state disability or unemployment insurance
Fica Tax: Wage Base Limits
A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. The wage limit changes almost every year based on inflation. In 2021, it was $142,800. For 2022, the limit rose to $147,000. This income ceiling is also the maximum amount of money thats considered when calculating the size of Social Security benefits.
Medicare taxes, on the other hand, dont have a wage limit. But theres an Additional Medicare Tax that high-income individuals must pay. That has been the case since January 1, 2013.
The Additional Medicare Tax rate is 0.90% and it applies to employees wages, salaries and tips. So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2.35% . That income ceiling for 2021 and 2022 is $200,000 for single filers, qualifying widows and anyone with the head of household filing status, $250,000 for married couples filing joint tax returns and $125,000 for couples filing separate tax returns. You can calculate how much you owe using Form 8959.
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Employer Paid Holidays Vacations And Sick Days
Many companies pay their permanent employees for holidays such as New Year’s Day, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas. It is not unusual for employees to be paid for 10 holidays per year. It is also common for employees to earn one week of vacation after one year of service. Many employers give their employees two weeks of vacation after three years of service, with more weeks given after 10 years of service.
Paid sick days are also a common benefit given to employees. If an employee is absent from work due to such things as illness or surgery, the company will pay the employee for the time missed. Employers generally set policies as to how sick days are to be used, and as to whether or not an employee is permitted to carry over unused sick days into subsequent years.
The matching principle requires that the cost of compensated absences be recognized as an expense during the time the employee is present and working. In other words, the cost is expensed when the benefit is being earned by the employee, not when the benefit is being used by the employee.
Arguments For And Against The Social Security Tax Cap
Proponents of increasing or eliminating the limit on earnings subject to the Social Security payroll tax argue that it would make the tax less regressive and be part of a solution to strengthen the Social Security trust funds. An analysis from the Congressional Budget Office estimated that phasing out the tax cap by subjecting earnings below the current taxable maximum and above $250,000, would have raised over $1 trillion in revenues from 2019 through 2028. Another argument is that removing the taxable maximum would adjust for the fact that higher-income individuals generally have longer life expectancies and thus receive Social Security benefits for a greater amount of time.
Opponents argue that increasing or removing the taxable maximum would weaken the link between the amount individuals pay in Social Security taxes and the amount they receive in retirement benefits. Opponents also contend that while low-income earners may pay a greater share of their income in Social Security taxes than those who are wealthier, they also receive a disproportionate share of government transfer payments that are not subject to the tax. Those opponents cite programs that have been created to at least partially offset the regressive nature of the Social Security payroll tax.
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How Do I Handle Independent Contractors Or Self
Independent contractors and self-employed individuals are not employees. However, employers should review the status of the worker to ensure that the individual is properly classified as an independent contractor. Businesses that engage them are not responsible for any employment taxes on payments made to them. These workers pay self-employment tax on their net earnings from self-employment , which is essentially the employee and employer share of FICA. If a self-employed person also has wages from a job, the wages are coordinated with the SE tax so that the wage-base ceiling can be properly applied.
If total payments to such worker in the year are $600 or more, the business must file an annual information returnForm 1099-NECto report the payments to the worker and to the IRS.
Payroll Taxes Paid By Employer
Do employers have to pay taxes on employees? Yes, yes they do. And here are the ones that employers are responsible for:
- Social Security tax
- Federal unemployment tax
- State unemployment tax
What about income taxes? Do employers pay income tax for employees? No, employers do not pay income taxes for their employees. Employees are solely responsible for income tax payments, which employers must withhold.
Now that you know which taxes are your responsibilities, you might be wondering, OK, so how much payroll tax will I pay? That answer depends. Your payroll tax liability varies based on the number of employees you have, how much you pay those employees, and where your business is located.
If you want to know how much your payroll tax liability is, familiarize yourself with how to calculate payroll taxes for employer share below.
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How To Calculate Federal Payroll Tax Withholdings
Unlike the flat rate FICA taxes, calculating federal income taxes is a little more complex. To determine what to withhold for an employee who earns up to $100,00 per year and has completed the revised 2020 Form W-4, employers may use the IRS wage bracket method as follows:
Payroll Taxes: What Are They And What Do They Fund
Payroll taxes fund social insurance programs including Social Security and Medicare and are the second-largest source of revenues for the federal government. In 2019, the most recent year for which data were not affected by temporary distortions resulting from the pandemic, payroll taxes made up 36 percent of total federal revenues. Most working Americans are subject to payroll taxes, which are usually deducted automatically from an employees paycheck. Employers are also often subject to those types of taxes.
- Taxes directed to the Social Security program were created by the Federal Insurance Contributions Act and are levied equally on employers and employees on all wages up to a certain level.
- Medicare taxes for its Hospital Insurance program are also part of FICA and are levied equally on employers and employees on all wages. The HI trust fund also receives inflows from a supplemental tax on high earners.
A few other types of federal payroll taxes also fund smaller programs:
- Employers pay taxes to fund the Unemployment Insurance program.
- Programs to fund retirement for federal employees and railroad workers also receive revenue from payroll taxes.
How To Calculate Fica Payroll Tax
Social Security withholding
To calculate Social Security withholding, multiply your employeeâs gross pay for the current pay period by the current Social Security tax rate .
This is the amount you will deduct from your employeeâs paycheck and remit along with your payroll taxes.
Example Social Security withholding calculation:
$5,000 x .062 = $310
To calculate Medicare withholding, multiply your employeeâs gross pay by the current Medicare tax rate .
Example Medicare withholding calculation:
$5,000 x .0145 = $72.50 (Medicare tax to be deducted from employeeâs paycheck
As an employer, you are responsible for matching what your employees pay in FICA taxes. In this case, you would also remit $310 for Social Security tax and $72.50 for Medicare tax.
Contribution And Benefit Base
Social Security’s Old-Age, Survivors, and Disability Insurance program limits the amount of earnings subject to taxation for a given year. The same annual limit also applies when those earnings are used in a benefit computation. This limit changes each year with changes in the national average wage index. We call this annual limit the contribution and benefit base. This amount is also commonly referred to as the taxable maximum. For earnings in 2023, this base is $160,200.
The OASDI tax rate for wages paid in 2023 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $160,200 would contribute $9,932.40 to the OASDI program in 2023, and his or her employer would contribute the same amount. The OASDI tax rate for self-employment income in 2023 is 12.4 percent.
For Medicare’s Hospital Insurance program, the taxable maximum was the same as that for the OASDI program for 1966-1990. Separate HI taxable maximums of $125,000, $130,200, and $135,000 were applicable in 1991-93, respectively. After 1993, there has been no limitation on HI-taxable earnings. Tax rates under the HI program are 1.45 percent for employees and employers, each, and 2.90 percent for self-employed persons.
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