Understanding Business Payroll Taxes
When a business begins to hire employees, it creates the need for that business to comply with a number of new IRS, state and local government agency tax reporting requirements.
As the owner of a business that has employees, you are responsible for paying a number of payroll taxes -- on both the federal and state levels -- on your employees' behalf. There are also state and federal payroll taxes that you must withhold from the paychecks that you issue to your employees. The money withheld from employee pay must then be sent to the appropriate tax agencies on a specific time schedule.
Business Payroll Tax Responsibilities
When you hire a new employee, make sure that he or she fills out a W-4 form. The W-4 form is used to calculate how much federal and state income tax must be withheld from each employee's pay.
Businesses must pay the following payroll taxes for each of their employees, above and beyond what they pay the employees in salary or wages:
- 6.2 percent of wages paid to Social Security taxes (employee also pays 6.2 percent to Social Security)
- 1.45 percent of wages paid to Medicare taxes (employee also pays 1.45 percent to Medicare)
- State unemployment taxes
- Federal unemployment taxes
Businesses must also take payroll deductions from their employees' pay. The money is deducted from the paycheck before an employee receives it, and then the employer is responsible for submitting the withholdings to the appropriate tax agencies. Payroll deductions that employers are required to withhold include:
- State income taxes
- Federal income taxes
- Employee portion of Social Security taxes
- Employee portion of Medicare taxes
- Local tax withholdings.
In addition to the taxes that the employer is required to pay for each employee and the deductions that they are required to withhold from their employees' pay for the employee-paid portion of tax payments, businesses are required to follow specific payroll tax reporting requirements.
Business reporting requirements involve:
- Filing Form 940 or 940EZ annually (federal unemployment tax return)
- Filing Form 941 quarterly (employer's quarterly payroll tax return)
- Filing Form 945 annually (return of federal income tax withheld)
- Filing Form W-2 for each employee (wage and tax statements)
- Filing required state and local agency paperwork
Employee Optional Payroll Deductions
In addition to the required payroll deductions for taxes, you can also withhold additional money from employee paychecks if they agree to the deductions. Typically, optional payroll deductions may include insurance premiums for health or life insurance, stock purchase plans, retirement plans, union dues and/or meal- and job-related expenses.
Trust Fund Recovery Penalty
When a business withholds payroll taxes it is their responsibility to turn over those taxes to the government. If a business fails to do so, the IRS sees this as stealing from them. The IRS enacted a Trust Fund Recovery Penalty Act to penalize those businesses that don’t comply with the rules. Similar rules apply for state payroll taxes as well.
The trust fund recovery penalty can be assessed against any person who is responsible for collecting or paying withheld income and employment taxes and willfully does not collect or pay them. It is important for businesses to comply with payroll tax laws or they can face steep penalties for delinquent payroll taxes.
Obtain Accounting or Payroll Assistance
For most business owners, it makes sense to hire an accountant or payroll company to assist with meeting the various requirements. They are knowledgable of all reporting and withholding requirements, and can for your own tax returns.
