Payroll Taxes
Payroll taxes are taxes withheld or paid by an employer for or on behalf of employees on amounts paid the employee. Payroll taxes include federal income tax withholding, state income tax withholding, social security and Medicare taxes, and federal and state unemployment taxes. Taxes paid are based on compensation, which includes all items paid to or on behalf of an employee except for certain excludable amounts such as qualified reimbursed business expenses or nontaxable moving expenses.
Before an employer can determine how to treat payments made for services, the employer must determine if the individual performing services is an independent contractor or an employee.
Independent contractors are people such as lawyers, accountants, architects, contractors, or subcontractors who follow an independent trade or profession in which they offer their services to the public. However, whether such people are actually employees or independent contractors depends on the facts of each particular case. Under common-law rules, anyone who performs services is an employee if the payor can control the details of how the services are to be performed. Facts indicative of the employment relationship include
- instructions as to when, where, and how to perform the work;
- payor-provided training;
- reimbursement of business expenses;
- payment by the hour, week, or month; and
- the payment of employee-type benefits such as insurance, vacation, and retirement benefits.
Facts indicative of an independent relationship include
- emphasis on results,
- independent training,
- unreimbursed business expenses,
- an investment by the worker in work facilities,
- payment by the job, and
- the extent to which the worker can realize a profit or loss on the transaction.
If an individual is an employee, the employer must withhold payroll taxes, including federal and state income taxes. The amount withheld depends on the amount of wages paid, the filing status, the number of pay periods, and the number of allowances claimed by the employee. Each employee is required to give the employer a signed Form W-4 that indicates the filing status and number of personal allowances claimed. The employee completes a worksheet provided with Form W-4 to assist with the computation of the correct number of personal allowances. An employee can claim less personal allowances but cannot claim more because the employee's taxes will be underpaid and subject to underpayment penalties.
Both the employer and employee are required to pay social security taxes. The employer pays 6.2% of the taxable wage base and withholds 6.2% of a fixed taxable wage base from the employee. Both the employer and employee are also required to pay Medicare taxes. The employer pays 1.45% of wages and the employer withholds another 1.45% from the employee. Wages for social security purposes include 401(k) contributions and deferred compensation.
Employers also must pay federal and, where applicable, state unemployment taxes. The tax applies to the first $7,000 of wages paid to each employee. For state unemployment taxes, the rate of tax and wage base will differ from state to state. However, an employer can take a credit against federal unemployment for amounts paid to state unemployment funds up to fixed percentage of taxable wages.
Employers are required to deposit payroll taxes at a financial institution authorized to accept federal tax deposits. Such deposits are required at set intervals based on the total tax liability reported during the previous four quarters or lookback period. If the total taxes reported in the lookback period were $50,000 or less, the employer is required to deposit payroll taxes on a monthly basis. If the total taxes reported in the lookback period were more than $50,000, the employer is required to deposit withholding taxes on a semiweekly basis. If an employer is a new employer, the employer is required to deposit payroll taxes on a monthly basis. However, if an employer accumulates a tax liability of $100,000 or more on any day during a deposit period, the employer must deposit the tax by the next banking day even if the employer is on a monthly or semimonthly deposit schedule.
Employers are required to file quarterly federal payroll returns. The quarterly payroll return is due the last day of the month following the end of the quarter. Failure to file the return or deposit the taxes when required can result in the imposition of penalties and interest.
Federal unemployment tax must be deposited quarterly. An annual federal unemployment tax return is due on January 31 of the year succeeding the current taxable year.
Employers are required to provide each employee with a Form W2, which is an annual summary of wages paid, and taxes withheld. The employer also files Forms W2 with the Internal Revenue Service and state taxing departments. The form is due to the employee by January 31 of the subsequent year.
Checklist: Annual Wage Reporting to the Social Security Administration
To read and printout a copy of the Form please link below.
Annual Wage Reporting to the Social Security Administration
You can download a free copy of Adobe Acrobat Reader at http://www.adobe.com/acrobat/readstep.html
Disclaimer
This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.
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