The payroll tax responsibility of an employer can be defined as the proportion of the employee’s salary that is held back by the employer to pay the taxes to the government for the employee. Salaries, wages, and tips make up for the taxes.
These payroll taxes are taken from the employee’s salary directly. These are then paid to Internal Revenue Service (IRS).
Payroll taxes in the US
- 1 Payroll taxes in the US
- 2 Employer’s responsibility for the following payroll taxes
- 3 Other employer’s responsibility
- 4 Are there penalties for not paying payroll taxes?
- 5 How can the employer stay ahead and fulfill their payroll tax responsibility?
Federal Payroll taxes in the United States are cut to fund Medical care and Social Security programs. These are known as MedFICA and FICA, respectively. Along with the Federal income taxes that are also withheld by the employer from the paychecks. These go into the U.S. Treasury’s general fund.
Most of the cities and states in the US have imposed income taxes as well. These are paid directly from the paycheck. An administration order that was issued by former President Donald Trump in August 2020 delayed payroll taxes.
From December 31st, 2020 for Americans earning lesser than $100,000 per year. Meaning they will not have to pay the taxes while unemployed, but they will have to pay it later.
Difference between income and payroll taxes
Both are deducted from an employee’s paycheck, they are quite different from each other. While Income taxes get added to the U.S. Treasury directly, payroll taxes are used for the benefits for the employee in fund-specific programs. Income taxes are progressive, whereas payroll is paid up to a yearly cap.
Employer’s responsibility for the following payroll taxes
Statutory payroll taxes
These deductions are required by the law. At each pay period, a set amount would be withheld from the employee’s salary. Payroll taxes include the following components:
- Withholding 1.45% for Medicare tax.
- 6.2% for Social Security taxes.
- Referring to withholding tables in Publication 15 for Federal Income tax.
- For employees earning over, $200,0001, an additional 0.9% tax is withheld for medical care.
- Withholding state income tax.
- Unemployment insurance for and other local taxes for the city, county, disability, or school district, etc.
Voluntary payroll deduction
As the name suggests, one can only hold it back if the employee consents to it. These are some of the that the beneficial elements for the employee in the long run.
- Health Insurance, for medical eye care and dental.
- Life insurance plans.
- Contributing to Retirement plans/ Pension plans
- Stock purchasing plans for the employee. (ESPP AND ESOP)
- Meals, union debts, uniforms, and other charges that are related to the job.
Federal Insurance Contribution Taxes (FICA)
Both the employer and the employee pay the FICA tax. It includes Medicare taxes as well as social security ones. Both the parties pay half of this tax. And the halves total up to 15.3%. This percentage includes the following:
- The contribution by the employer for Social Security: 6.2 percent
- Contribution by the employer for Medicare: 1.45 percent
- Employer Contribution by the employee for Social Security: 6.2 percent
- Contribution by the employee for Medicare: 1.45 percent
Other employer’s responsibility
- The employer has to collect information on the employee through a W-4 form. These forms are mandatory for all the employees to complete so that their employer knows how much amount is to be withheld on the behalf of the federal income tax.
The employer is not responsible for making sure that the right amount is being withheld, these forms aid for that purpose.
- Taking the pertinent taxes from the employee is a responsibility too. Payroll tax amount withheld should include the following: federal, state, and local taxes.
FICA taxes that are held back are also paid by the employer. These taxes are held back based on the gross pay.
- Funds are set aside for both the employer and the employee. This amount is stored in a trust and can be acquired in a time of need. They are generally for Medical care or social security as well as the employer’s responsibilities of unemployment taxes.
- Ensure that the tax amount is being sent to the correct agencies. As in, IRS is responsible got the Federal tax income and the Social security/ Medical care taxes. Both the employer and the employee pay as well as collect the FICA taxes.
In short, the employer is responsible for sending tax amounts for themselves and the workers.
- Employer and Employee tax reports are taken by the employer and provided to the employee as well. And if there is any tax debt that is remaining, inform the concerned agencies about the same.
- The reports acquired are to be supplied to the federal, state, and local agencies. An employment report of all new employees is to be sent to the agencies.
Are there penalties for not paying payroll taxes?
There can be criminal and civil consequences for not paying the employment tax as dictated by the law. If the employer does not report these taxes, they can be charged with a criminal offense. A failure to pay taxes to the government can result in a $10,000 fine and five years of prison time.
More aggressive charges for failure to pay taxes are mainly for those who are unable to pay them for personal gains.
However, if one has been unable to pay their taxes due to legitimate reasons, they can reach out to the IRS for help. IRS offers compromise as well as installment agreements in which the employer can pay their taxes in due time.
It is also important to note that, the employer should register with the agencies to receive their unique ID numbers that are significant for tax filing.
How can the employer stay ahead and fulfill their payroll tax responsibility?
- The employer can set a system that can aid them in withholding tax, accounting for them, reporting them as well as paying them on time. These systems work automatically and are ideal for employers who manage a fairly large business.
The systems that offer payroll accounting vary according to every business’s needs. One should lookout for one that suits theirs.
- Another suggested solution is to maintain a separate bank account for payroll tax payments. This will allow the employer to sort the financial data swiftly and it would not tangle with their personal finances.
- Otherwise, the employer can hire someone to do it for them. An accountant would be able to help the employer with this or they can hire a company or a freelancer to help them manage the payroll taxes.
They will help in the creation of paychecks, put the money aside for them, draft reports and send the money to the agencies.
- Also, there are online apps that can be used for payroll taxes. (Examples: Paychex, Gusto)
As an employer, one is responsible to keep the tax record of both the employer and themselves. Do not delay the taxes as it can mean more than necessary. While, there are special circumstances, and the agencies do have measures to help out people to pay their due taxes, they must keep up backups for these situations.
For years I have studied the irs regulations regarding forms and taxes. All the information in this blog is sourced from the Internal Revenue Service (Irs) of the United States government .
Salesforce Certified SALES & SERVICE Cloud Consultant in february 2020, Salesforce Certified Administrator (ADM-201) and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.