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Payroll Tax Basics for Small Business Owners

Taxes

When you hire employees for your business, you take on a myriad of responsibilities and obligations to follow specific laws and regulations. One is paying payroll taxes. If you outsource your payroll process to an outside company or bank, it can help you figure out which taxes are due when, but it’s still a good idea to familiarize yourself with the taxes that you’re required to pay.

Federal Income Tax, Social Security, and Medicare taxes: You need to withhold federal income tax from employees’ wages. The exact amount is determined based on the information employees provide on their W-4s. You can refer to IRS Publication 15 for more information on the correct amount. You’ll also need to withhold part of employees’ Social Security and Medicare taxes; then the company pays the matching amount.

Because of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, payroll taxes have been cut for 2011. Employee payroll taxes have been cut by 2 percent and their Social Security tax withholding rate has been reduced from 6.2 percent to 4.2 percent of wages paid. See the IRS website for more information.

Federal Unemployment Tax (FUTA): As an employer, you pay this tax from your own funds. This is not a tax taken from employees. FUTA is a percentage of your employees’ salaries.

Self-Employment Tax: Even if you don’t have any employees, you still need to pay Social Security and Medicare taxes for yourself.

Electronic Filing: The IRS now requires all businesses to deposit employment taxes via the Electronic Federal Tax Payment System (EFTPS).

At the end of the year, businesses must complete Form W-2 Wage and Tax Statement to report employees’ wages, tips, and other compensation. A copy of this form is required by law to be given to the employee. If you have a payroll service, it will compile and issue these forms for you. Independent contractors must be issued a similar wage form called a Form 1099.

Payroll taxes are due as often as you pay your employees. To lessen the burden on small businesses, the IRS has simplified the rules for filing employment taxes. If you believe your employment taxes will be $1,000 or less, you can request to fill out a different tax form and only file employment taxes once a year (instead of monthly or bimonthly).