Payroll Taxes for Your Small Business

Payroll taxes are due either semi-weekly or monthly depending on the size of your payroll. The IRS will dictate the schedule. If your total payroll won’t come to $2,500 for the quarter, you can file quarterly.

You may consider using a payroll software program to handle your payroll needs.

If your company is growing and you have an increasing number of employees, you might opt for an outside payroll service. The largest such services are Automatic Data Processing (ADP) and Ceridian. Both specialize in handling your payroll needs. ADP alone provides paychecks to over 30 million workers.

Social Security & Medicare (FICA): The Social Security Program, created in 1935, by an act of Congress (the Federal Insurance Contributions Act or FICA) has relied primarily on withheld payroll taxes from employee paychecks to generate retirement savings. The goal was to provide American citizens with retirement income or financial assistance in the event of disability or death of the primary wage earner. Today, more than 90% of retired Americans receive Social Security. Unfortunately, because the rate of inflation has outpaced Social Security, the impact of the program on retiree’s income is less significant than in the past.

Medicare, meanwhile, is designed to help people over the age of 65 pay for medical costs. While it does not pay for many types of medications, it does help nearly 98% of Americans over the age of 65 with some portion of their medical bills.

In addition to the money that, by law, is withheld from each employee’s paycheck for FICA, the employer is also required to match the amount. The amount for FICA is currently 7.65%, which is comprised of 6.2% for Social Security and 1.45% for Medicare. To determine how much Social Security and Medicare tax to pay, see IRS Publication 15.

The time frame in which you are required to pay FICA will depend on the size of the payroll. The larger the payroll, the faster you need to send in the payments. For example, a very small business with one employee might file quarterly, while a large company with a $100,000 weekly payroll, will need to file within three days after payroll is completed. Again, this schedule will be provided for you.

Employment Taxes: Each business is required by law to withhold federal income taxes from the wages of its employees.

Withholding taxes are filed in accordance with the W-4 Employee’s Withholding Allowance Certificate, which is filled out by each employee. The W-4, in conjunction with IRS Publication 15, is used to determine how much federal income tax you are required to withhold. Amounts will vary depending on:

The number of withholding allowances claimed by the employee

The marital status of the employee

Any exemptions from withholding taxes claimed by the employee

Employees can change the amount withheld by submitting a new W-4 Withholding Certificate and changing the number of withholding allowances (dependents) and their tax status.

If you do not withhold the proper amount, fail to pay federal withholding taxes or pay late, you are subject to penalties by the IRS.

Note: All businesses that employ other people on the books must have an individual EIN, or Employment Identification Number. Therefore, if you are partners in more than one company, or you purchase a new business in addition to your own, you will need a separate EIN for each business entity or company. By filing an SS-4, Application for Employer Identification Number, you can obtain additional EIN’s from the IRS service center in your state for each business.

Unemployment Taxes: To ensure that unemployment pay is available to employees who have lost their jobs, the Federal Unemployment Tax Act of 1939 was passed by a vote in Congress.

According to the Department of Labor, "The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law."

Businesses are required to report federal unemployment tax on IRS form 940 and pay both federal and state unemployment tax. Unlike FICA and federal withholding taxes, unemployment taxes are not withheld from the employee’s wages, but are paid entirely by the business. The state unemployment tax rate is a percentage based on the total number of employees you have and the number of former employees that are collecting unemployment at any given time.

If you pay the full amount to the state, the federal government only requires you to pay .8% for up to $7,000 in income, for each employee on your payroll, which is a minimal amount ($56). However, the federal unemployment tax is 6.2% if you do not receive the maximum state credit.