Payroll taxes, also called employment taxes, are a group of taxes that you, as the employer, are required to withhold and/or pay on behalf of your employees. There are 3 basic types of payroll taxes:
- Income Withholding Tax
- Social Security and Medicare Taxes (FICA)
- Unemployment Tax
All of the above taxes must be remitted to the appropriate agency according to the mandated payment schedules. The due dates for these taxes can vary by each business, so make sure you know when the due dates for your business are (see below for some basic information on due dates).
Income Withholding Tax
Withholding taxes consist of federal, state and local withholding taxes. What taxes need to be withheld depend on the location(s) where your employees work and whether that jurisdiction is subject to income tax. For example, not all states have income tax, so employers in these states may not need to withhold state income taxes. On the other hand, other states have both state and local income taxes, so employers in those areas may withhold federal, state and local income taxes.
Here in Minnesota, we are subject to federal and state withholding taxes. As an employer, you are required to withhold taxes according to tax tables established for withholding by both the IRS and Minnesota. If you use a payroll service or software to calculate payroll, then your taxes are most likely calculated automatically. If you have only a few employees, and calculate payroll manually, you need to make sure you use the published withholding tables to figure the correct amount of tax to withhold.
Withholding taxes must be remitted by the due dates as established by the IRS and the state/local jurisdiction. If you have a small payroll tax liability, you may only need to remit taxes quarterly. Most employers, however, are required to remit taxes either on a monthly or semi-weekly basis. It is important to review your tax liability using the IRS's "look-back period" at the beginning of each year, as the due dates may change (i.e. if you have added employees or increased wages, you may become a semi-weekly depositor instead of a monthly depositor).
Social Security & Medicare Taxes (FICA) Social Security and Medicare taxes established by the Federal Insurance Contributions Act to provide benefits to retirees, the elderly, disabled and dependent children of deceased workers. These taxes consist of a portion that is withheld from the employee and a portion that is paid by the employer. If years past, the portions for each has been equal (6.2% for Social Security and 1.45% for Medicare). However, the employee's portion of Social Security was temporarily reduced to 4.2% for 2011 and 2012). Social Security is calculated on the first $110,100 of income; there is no limit on Medicare tax. These taxes must be remitted along with the Federal Withholding Tax according to the payment schedule as determined by your tax liability. Additionally, you must file Federal Form 941 quarterly, regardless of your tax liability. The 941 form is a recap and reconciliation of your tax liability and tax deposits paid. The form is due by the last day of the month following the quarter (Apr 30, July 31, Oct 31 and Jan 31). Unemployment Taxes Unemployment taxes are paid solely by the employer. They consist of both federal (FUTA) and state (SUTA) tax. The federal rate for 2012 is 6.0% on the first $7000 paid to an employee. However, if you also pay state unemployment tax (which we do here in Minnesota), then you can take up to a 5.4% credit, resulting in a net rate of .6% for FUTA. FUTA tax is due quarterly, on the last day of the month following the quarter (same as the 941 return), unless your tax liability is less than $500. If less than $500, you can carry it forward until the next quarter. However, all FUTA taxes must be paid by the due date of the 4th quarter return (Jan 31). NOTE: In 2011, Minnesota became a credit reduction state, which resulted in a decrease of the Federal credit of .3%, so the overall rate Minnesota businesses had to pay for FUTA was .9%. Since the credit reduction is not calculated until late in the year, it is best to check the IRS's web site for information on whether Minnesota will once again be a credit reduction state for 2012. If so, the additional tax must be paid with your 4th quarter FUTA tax return. The Minnesota unemployment rate is calculated on the first $28,000 paid to each employee and depends on the experience rating assigned to your business by the state. The rating is calculated using the actual unemployment claims made against your account in previous years. If you have a business where employee turnover is high or you employ a lot of seasonal workers, you will most likely pay a higher unemployment rate than a business with low employee turnover.
Something to note for business owners: If you own more than 25% of a corporation, or are a sole proprietor or member of a partnership, you are considered a non-covered employee, not subject to state unemployment tax. You can elect coverage if you want to be eligible for unemployment benefits, but be aware that your benefits are quite limited, even if you elect coverage. Also, non-covered employee wages for a corporation don't qualify for the FUTA credit reduction, so any non-covered employees should have FUTA taxes paid at the full 6.0%. Payroll taxes and the surrounding rules are many and varied, and fines and penalties can be steep, so it pays to be informed about your payroll tax obligations and make sure you are meeting the requirements for withholding and paying taxes. If you would like further information on payroll taxes for your business, please give me a call or consult the following web sites: Federal Withholding, FICA and Federal Unemployment: www.irs.gov |