There are some obligations associated with running a small business. One of these is withholding payroll taxes. It is not a choice – it is a must-do if you want to stay on the right side of the law. Failure to withhold payroll taxes incurs fines and penalties for your business. According to the IRS Publication 15, if you fail to remit taxes, you will eventually have to pay the amount due plus an “additional tax.” This extra tax can range from 2 percent to 15 percent per month after a tax return is late.
Payroll Taxes and How to Pay Them
There are basically three classes of payroll taxes:
- Federal Income Tax
- Federal Insurance Contributions Act (FICA) Taxes
- State and Local Taxes
Oftentimes, your business is required to remit all three classes of taxes. Neither the calculation nor remittance of these taxes follows the same process. They also differ in complexity.
Federal Income Tax
Usually, this is the first tax class that comes to mind when withholding payroll taxes is discussed. The FIT is deductible on all earning types that constitute the taxable income of an employee. The taxable income of an employee excludes declared allowances. Declared allowances may also be referred to as exemptions or deductions.
There are alternate methods on how to calculate income tax. Commonly used methods are the Percentage Method and Wage Bracket Method. Withholding FIT is dependent on three factors:
- Tax Bracket
- Number of allowances claimed on Form W-4
- Marital Status
How to Pay
Remitting Federal Income Tax follows the same process as the remittance of Federal Insurance Contributions Act taxes (filling a Form 941 quarterly).
Federal Insurance Contributions Act Taxes
FICA taxes are commonly known as Medicare and Social Security taxes. The tax burden rests on both the employer and the employee. However, remittance of the tax is a responsibility that falls solely on the employer.
- Medicare Tax
Currently, employees and employers forfeit 1.45 percent each with no maximum limit. For employees with an annual salary of $200,000 and above, there is an additional tax of 0.9 percent depending on marital status. This additional tax is only to be withheld from the employee.
- Social Security Tax
Presently, the tax rate is 6.2 percent each for both the employee and the employer. There is a maximum wage base limit of $117,000. Thus maximum tax amount to be remitted per employee is $7,254.00.
How to Pay
Small business owners are required to file Form 941, “Employer’s Quarterly Federal Tax Return,” every quarter to remit withheld Medicare and Social Security taxes.
State and Local Taxes
Unlike the other two tax classes, these taxes vary by region:
- State Taxes
Currently, 43 states require small business owners to remit state income tax. The seven exceptions are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
- Local Taxes
In addition to FICA, FIT, and State taxes, some localities may require small businesses to withhold local income taxes. Local taxes are restricted to a school district, county, or city.
How to Pay
First, you will have to confirm what taxes should be withheld from your state and local governments. You should get information on the amount to withhold – caps, if any; exceptions, if any; and how to remit the tax to the appropriate organization.
When Should You Deposit Withheld Taxes?
Deposit times for FIT and FICA Taxes are dependent on the deposit schedules of the IRS. There are two schedules: monthly and semi-monthly. Which deposit schedule you go with depends on the total tax liability as declared on your completed Form 941.
The route of making deposit is the Electronic Federal Tax Payment System (EFTPS). Worthy of note is that exceptions exist with the use of the EFTPS platform. Therefore, you should verify from the IRS Publication 15 before going ahead to use the EFTPS platform.
It is pertinent to add that while remitting withheld taxes, ensure that you remit unemployment taxes. There are two forms, Federal Unemployment Tax and State Unemployment Tax. Both operate under the regulation of the Federal Unemployment Tax Act (FUTA) and must be remitted to the appropriate authority. With the exception of Alaska, New Jersey, and Pennsylvania; the employer is required to solely pay federal and state unemployment taxes. As such, they are not withheld from employees.
If you need help in understanding how to manage payroll taxes for your small business, talk to TRAXPayroll today and receive expert guidance.