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Responsibility for Payroll Taxes
In general, any compensation that an employer gives an employee is subject to payroll taxes. There are some minor exceptions for small, non-cash Christmas gifts and a few other incidental exceptions, but generally, anything an employer gives an employee constitutes a taxable transaction. The law presumes, that, in general, employers don t just give gifts to employees but rather that such transactions are (almost) always some manner of compensation.
An often overlooked payroll tax responsibility is for tip income. Though not paid directly by the employer, employees who receive tip income must report it to the employer so that both income tax and FICA can be withheld and paid. Failure to do so can result in painful consequences, in the form of large penalties, to employees.
Here s a list of payroll taxes that employers must take into account:
- Federal Income Tax
- State, and perhaps local, Income Tax (all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming)
- FICA (Federal Insurance Contributions Act): two taxes in one, currently 6.2% for Social Security old age benefits and 1.45% for Medicare but it changes pretty much every year
- Federal Unemployment Tax: not withheld from employees but paid by businesses based on payroll
- State Unemployment Tax: a rate assigned to individual employers based on individual state formulas which take into account the rate of involuntary unemployment suffered by employees
Reporting Requirements and Deposits
We re all used to filing our annual tax returns, but for employers, the requirements are much more frequent and can change with numbers of employees and payroll amounts. It s critical that all of these forms be filed accurately and in a timely manner and that all required payments be made on time. Substantial penalties are levied on businesses that fail to fully comply. This is a representative listing of requirements for employers:
- Quarterly returns for Federal Income Tax withholding from employees
- Monthly, or more frequently, deposits of federal income taxes withheld
- Quarterly filing and at least quarterly payments of state income taxes withheld
- Quarterly filing and payment of state Unemployment Insurance taxes
- Annual returns for all the above plus preparation and transmission of W-2 Wage & Tax Statements
And Don t Forget Self-Employment Taxes
If your business is incorporated, it s likely that the owner or owners are considered employees and the company is responsible for payroll tax withholding, reporting and deposit just as with other employees. For other business organizations such as sole proprietorships, partnerships and Limited Liability Companies, owners are typically responsible for federal and state income tax as well as Self Employment Tax, which essentially corresponds with an employee s FICA. The added obligation with Self Employment Tax, however, is that the business owner pays the equivalent of the employee and the employer portion of the Social Security and Medicare obligations.