Payroll Taxes & Forms

A simple guide on payroll taxes and the forms involved.

Understanding Employer Tax Responsibilities: 

Running a business involves more than just daily operations and marketing strategies—it also requires a solid understanding of tax obligations. Knowing which forms to submit and when is essential for compliance. Here’s a guide to some fundamental tax forms and deadlines that every business owner should be aware of.

Form W-4: Employee Withholding

When you hire new employees, they must complete a Form W-4, the "Employee’s Withholding Certificate." This form helps you determine the appropriate amount of federal income tax to withhold from an employee's paycheck, based on their filing status and allowances. The form remains valid until the employee provides an updated one, and it's their responsibility to do so if their circumstances change.

Social Security and Medicare (FICA)

Under the Federal Insurance Contributions Act (FICA), employers must withhold Social Security and Medicare taxes from employee paychecks and contribute an additional employer portion. The current employer rates are 6.2% for Social Security and 1.45% for Medicare. If an employee earns over $200,000, a Medicare surtax applies. These taxes support the Social Security retirement program and the Medicare healthcare system.

Depositing Federal Taxes

Employers must deposit withheld federal income taxes, Social Security, and Medicare contributions using the U.S. Department of Treasury's Electronic Federal Tax Payment System (EFTPS). Deposits are due either monthly or semi-weekly, depending on the total tax liability reported on Form 941 during a designated lookback period. This deposit schedule is not based on your pay cycle, so keep an eye on your tax liability to avoid penalties. Form 941 is used to report and deposit federal taxes quarterly.

Federal Unemployment Tax Act (FUTA)

Employers also need to deposit unemployment insurance taxes under the Federal Unemployment Tax Act (FUTA). The corresponding form, Form 940, is filed annually. Deposits are required only when the total tax liability exceeds $500 in a quarter, and the deadline is the end of the month following the quarter-end. Remember, FUTA taxes are not deducted from employees' wages, so ensure you're funding this obligation solely from employer resources.

Penalties for Late Deposits

The IRS imposes penalties for late tax deposits. These penalties increase over time, with a 2% penalty for deposits one to five days late, and a 10% penalty for those made 16 days or more after the due date. Staying on top of your tax deposit schedule is crucial to avoid these additional costs.

Reporting Federal Taxes

Quarterly, employers must file Form 941 to report federal income tax withheld, as well as Social Security and Medicare contributions. Specific situations may require other forms. For instance, agricultural businesses file Form 943 annually, while some companies may be required to file Form 944 instead of quarterly Form 941. Additionally, businesses may need to file Form 945 for withheld non-employee federal income tax.

Form W-2: Annual Wage Reporting

Employers must issue Form W-2 to employees at the beginning of each year. This form provides a summary of wages and tax withholdings for the previous year. Employers must also send Copy A to the Social Security Administration and Copy 1 to state or local tax departments, if applicable.

Form 1099: Reporting for Independent Contractors

If your business hires independent contractors, freelancers, or seasonal workers, and they earn $600 or more in a year, you'll need to provide them with Form 1099-MISC. This form must be issued to contractors by January 31 of the following year, with a copy sent to the IRS by February 28, or March 31 if filed electronically.

State and Local Taxes

In addition to federal taxes, employers often have state and local tax obligations. This may include state income tax withholding, state unemployment tax (SUTA), and local taxes, depending on where your business operates. It's important to understand state-specific requirements and to comply with state-level reporting deadlines.

Workers' Compensation Insurance

Employers are typically required to carry workers' compensation insurance to cover workplace injuries or illnesses. Discuss how this requirement can impact payroll costs and why it's crucial for compliance with state laws.

Garnishments and Levies

Sometimes employers must withhold additional amounts from employee paychecks due to court-ordered garnishments or IRS levies. To learn more about Garnishmsnets click here 

Fringe Benefits and Other Compensation

Aside from regular wages, many businesses offer fringe benefits like health insurance, retirement plans, and bonuses. These benefits can have tax implications for both the employer and employees.

Recordkeeping and Compliance

Discuss the importance of maintaining accurate payroll records, including timesheets, tax forms, and other documentation. The IRS and other regulatory agencies require that these records be kept for a certain number of years. Employers must also be prepared for audits and other compliance checks.

Independent Contractors vs. Employees

Since misclassification of workers can lead to tax penalties and legal issues, include a section on distinguishing between independent contractors and employees. Visit IRS guidelines to learn more about correctly classifying workers.

Employer Identification Number (EIN)

Before you start processing payroll, you need to obtain an Employer Identification Number (EIN) from the IRS. This unique number identifies your business for tax purposes and is required for all federal tax-related filings.

Year-End Tax Obligations

Outline what employers need to do at year-end, including issuing W-2 forms to employees, filing W-3 with the Social Security Administration, and filing 1099 forms for contractors. Visit IRS Year end reminders for deadlines for these filings and the potential penalties for late submissions.

Compliance with Employment Laws

Beyond tax obligations, employers must comply with a variety of employment laws, such as the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and anti-discrimination laws. Visit this SHRM website for compliance resources.

Additional Resources

To ensure you're up to date with all tax requirements, review the IRS's " Publication 15 (Circular E), Employer's Tax Guide." If you're unsure about employee classification or other tax-related questions, take a look at this article and consider seeking professional advice to avoid compliance issues.

By understanding these essential forms and deadlines, you can navigate tax responsibilities with confidence and avoid costly penalties or compliance issues.

Updated 5.8.23