Learn about your payroll tax responsibilities
Hiring employees is an important step for a growing business, but it also comes with payroll tax responsibilities that continue throughout the year.
Whether you manage payroll yourself or use a payroll provider, it’s important to understand what your business is responsible for withholding, paying, reporting and keeping on file.
What Payroll Taxes Am I Responsible for as an Employer?
Employers generally must withhold federal income tax, Social Security tax and Medicare tax from employees’ wages. Employers are also responsible for their share of Social Security and Medicare taxes and may have federal unemployment tax obligations.
Those taxes must be deposited and reported according to IRS requirements and deadlines.
What Taxes Do I Withhold From My Employees’ Paychecks?
Employers generally withhold three types of federal taxes from employee wages:
- Federal income tax
- Social Security tax
- Medicare tax
Federal income tax withholding is generally based on the employee’s wages and the information provided on Form W-4, Employee’s Withholding Certificate. Social Security and Medicare taxes are also withheld from employees’ wages, but these work differently because the employer generally pays a matching share.
Does My Business Pay Payroll Taxes Too?
Yes. Payroll taxes aren’t limited to amounts withheld from an employee’s paycheck.
Employers generally pay their share of Social Security and Medicare taxes. Businesses may also be responsible for Federal Unemployment Tax Act (FUTA) tax, which is paid by the employer rather than withheld from employees’ wages. This is one reason the cost of hiring an employee is more than simply the employee’s salary or hourly wage.
How Do I Pay Payroll Taxes to the IRS?
Federal tax deposits must be made electronically. Depending on the business, IRS payment options may include the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay for businesses and Business Tax Account for eligible users. The important part is knowing when your business is required to deposit payroll taxes. Depending on your circumstances, federal employment-tax deposits may follow a monthly or semi-weekly schedule. FUTA has separate deposit requirements.
Quick Tip: Don’t confuse deposit deadlines with tax-return filing deadlines. Depositing the payroll taxes your business owes and filing the forms that report those taxes are separate responsibilities.
What Payroll Tax Forms Does My Business Need to File?
For many employers, Form 941, Employer’s Quarterly Federal Tax Return, is used to report wages and federal income tax withholding as well as the employer and employee portions of Social Security and Medicare taxes.
Other employment-tax forms may apply depending on the business, including:
- Form 940 for federal unemployment tax
- Form 944 for certain small employers the IRS has authorized to file annually instead of quarterly
- Form W-2 to report each employee’s annual wages and taxes withheld
The forms and filing schedule that apply to your business depend on your particular circumstances.
What If I Use a Payroll Company?
Using a payroll provider can make payroll much easier, but business owners should still understand what is being filed and paid on their behalf. Keep copies of payroll reports and tax filings, review your business records regularly and make sure required tax deposits are actually being made. The IRS recommends that employers maintain employment-tax records for at least four years.
What If Someone Working for Me Is an Independent Contractor?
Employees and independent contractors are treated differently for federal tax purposes, which makes proper worker classification important. As a general rule, Employers withhold and pay employment taxes for employees. However, businesses generally do not withhold those same employment taxes from payments made to independent contractors. Calling someone an independent contractor doesn’t necessarily make them one. If you’re unsure how a worker should be classified, talk with your tax professional before assuming payroll taxes don’t apply.
Why Is It Important to Stay on Top of Payroll Taxes?
Payroll taxes aren’t something to address only when you file your annual business tax return.
Withholding, deposits, reporting and recordkeeping happen throughout the year, and missing a required deposit or filing can create unnecessary tax problems for the business. The IRS also recommends protecting payroll information by limiting access to payroll systems, using multifactor authentication and independently verifying requests to change employee direct-deposit or other sensitive information.
What Should I Do If I’m Not Sure My Payroll Taxes Are Being Handled Correctly?
Start by reviewing how your payroll is currently being handled. Make sure you know who is responsible for calculating withholding, making federal tax deposits, filing payroll tax returns and maintaining the records. If you use an outside payroll provider, understand which responsibilities it handles and what still requires your attention. If something doesn’t look right—or you’re preparing to hire your first employee—talk with your tax professional before a small payroll issue becomes a bigger one.
Barklee Can Help
Payroll taxes are an ongoing part of having employees, and understanding your responsibilities can help you avoid surprises and keep your business on track. The Barklee Financial Group can help you understand how federal payroll tax requirements apply to your business and identify questions that should be addressed before they become problems.
