Payroll and Taxes: A Quick Review
Running a company? You have a lot of tax responsibilities. Among them, you must withhold federal income tax from your employees’ earnings. So that you withhold the correct amount, each employee must complete and then share with you IRS Form W-4, Employee’s Withholding Certificate. You can suggest that, to find the best amount to ask you to withhold, they use the Tax Withholding Estimator tool. You can find the appropriate method for withholding and a withholding table described in Publication 15-T, Federal Income Tax Withholding Methods, at irs.gov.
You also must withhold Social Security and Medicare taxes and pay the employer’s share of those taxes.
- Social Security and Medicare have different rates, and Social Security tax has a wage base limit, which is the maximum wage subject to the tax for the year. Publication 15, Circular E, Employer's Tax Guide, has the current year's Social Security and Medicare tax rates as well as the Social Security wage base limit.
- Determine the amount of withholding for Social Security and Medicare taxes by multiplying each payment by the employee tax rate.
- You’re also responsible for an Additional Medicare Tax of 0.9% on any employee’s wages and compensation that exceeds $200,000 in a calendar year. Publication 15 includes questions and answers regarding the Additional Medicare Tax. There’s no employer match for this tax.
A third obligation is to report and pay federal unemployment tax, which is done separately from federal income tax and Social Security and Medicare taxes. Employers pay federal unemployment taxes themselves; they cannot be paid by employees or withheld from their pay.
Don’t forget to file
Finally, you must report and deposit these taxes. This is done by preparing and filing the following IRS forms:
- Form W-2, Wage and Tax Statement, to report wages, tips and other noncash payments to employees at your business. Copies of this form are filed with the government and distributed to your employees to use for their tax returns.
- Form W-3, Transmittal of Wage and Tax Statements, is a summary of all your W-2s and is used to transmit the information to the Social Security Administration.
If you use the Electronic Federal Tax Payment System to file taxes with the IRS, it’s free. Other methods — such as Automated Clearing House, a third-party transfer from your tax professional or payroll service, or a same-day wire transfer from your financial institution — may come with fees.
Employers with employees do not need to be concerned with self-employment tax, which is primarily for individuals who work for themselves. It’s equivalent to Social Security and Medicare taxes that get withheld by employers, but independent contractors have to pay those taxes themselves.
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