Someone wrote in saying she had just been hired as the bookkeeper for a small business, and that even though she has done A/P and A/R in the past, she has never done payroll before. Her employer is using QuickBooks (desktop) with an Enhanced Payroll Subscription.
She wants to better understand how "payroll taxes" work.
Payroll taxes are those taxes withheld from each employees' paychecks and those that an employer must pay based upon the wages paid to each employee. These taxes include the following:
- Social Security & Medicare
- Federal & State unemployment
- Personal Income Tax (Federal & State)
- Miscellaneous Other State Taxes
Payroll Taxes for 2017
Most payroll taxes, such as income taxes, apply to all earnings. However, some taxes have a wage cap. That is, the maximum annual earnings per employee that's subject to that tax. These caps can be adjusted by the governing agency (typically annually).
Social Security
This is paid by both employers and employees. As an employer, you withhold the employee's part of the taxes and also pay the federally regulated amount for the company portion.
The tax rate (amount withheld) for social security is 6.2 percent and applies to both employees and employers. This is a tax with a wage cap, which means it is calculated only up to a maximum dollar amount of wages per employee each year.
For 2017, the wage cap for social security is $127,200.
Medicare
This is paid by both employers and employees. As an employer, you withhold the employees' part of the taxes and also pay the federally regulated amount for the company portion.
The employee tax rate (amount withheld) for Medicare is 1.45 percent for most employees. The employee Medicare rate increases to 2.35 percent on wages over $200,000.
The employer tax rate for Medicare tax is set at 1.45 percent, regardless of wage amounts. There is no wage cap for Medicare tax, which means the tax is paid on all of the wages that the employee earns. The exception is exempt wages.
Some types of employees are exempt from one or more payroll taxes (they do not pay those taxes). For example, a minor working for a parent who is a sole proprietor does not have to pay social security, Medicare or FUTA.
In addition, certain portions of regular employees' wages might be exempt from one or more payroll taxes. For example, tax-sheltered or pretax insurance plans save both the employer and the employee money by exempting premium amounts from all federal taxes and some state taxes.
Some fringe benefits, such as S-Corporation owners' health insurance, also are taxed differently from regular wages.
If your company is a not-for-profit 501(c) (3) corporation, you do not pay any FUTA taxes, regardless of who your employees are.
Personal Income Taxes (Federal / State)
The amount of federal income tax (FIT) withheld from employees' paychecks depends on their marital status, the number of withholding allowances (exemptions) they claim on Form W-4, pay frequency and their projected annual income.
In addition, all but nine states have a personal income tax (PIT) (exceptions are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming).
It can be a flat tax rate (as in Illinois), regardless of projected income or a graduated tax rate based on annual income, such as FIT.
In some states, employees can also pay local tax (to cities, counties or school districts) from their paycheck.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA), along with the state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs.
For 2016 and 2017, the effective FUTA tax rate is 6.0 percent. However, most employers qualify for the 5.4 percent state unemployment tax credit, which lowers the effective rate to 0.6 percent. The tax applies to the first $7,000 employers pay to each employee as wages during the year.
However, if any of your employees are exempt from State Unemployment Insurance (for example, if they are Directors or Officers), your FUTA tax may be higher.
Also, if your state has borrowed funds from the federal government to cover shortfalls in its unemployment insurance program, all employers in your state may be subject to additional tax liability at the end of the year to repay those loans.
State Unemployment Insurance (SUI)
The money that all states maintain as a reserve for unemployment funded through an unemployment insurance tax. In most cases, SUI is paid only by the employer.
Employees in some states, such as New Jersey and Pennsylvania, also contribute to SUI through their paychecks.
Most states have established a starting SUI rate for new employers. After a designated period of time, employers are assigned an "experience rate," which can be higher or lower than the new employer rate, depending on the employer's reserve account balance. Employers will receive a notice from the state if their SUI rate changes.
Paying and Reporting Federal Payroll Taxes
Employers are responsible for payroll taxes on the date they pay their employees, regardless of when they did the work associated with their paychecks. If an employer pays their employees on Fridays, the tax liability occurs on those Fridays as well. The IRS is only concerned when employees are paid, not the time frame in which the money is earned.
Taxes are due according to established deposit schedules based upon Internal Revenue Service (IRS) rules. The following deposit schedules apply to all federal taxes other than FUTA:
- Monthly depositors: You are a federal monthly depositor in 2017 if your company's federal tax liability during the look-back period (defined as 7/1/15 through 6/30/16) was less than $50,000. All new employers are monthly depositors. Monthly depositors pay taxes for a given month by the 15th of the next month. For example, June taxes are due by July 15; however, if the 15th falls on a weekend or bank holiday, the taxes are due the next banking day.
- Semiweekly depositors: If your look-back period (7/1/15 through 6/30/16) liability was greater than $50,000, you are defined as a semiweekly depositor. You must pay your taxes within three banking days after the end of any semiweekly period in which you accrued a liability. The IRS divides the week into two periods:
- Wednesday, Thursday and Friday
- Saturday, Sunday, Monday and Tuesday
Taxes accrued during the Wednesday through Friday period are due on the following Wednesday, and taxes accrued during the Saturday through Tuesday period are due on the following Friday.
In some cases, when a bank holiday (such as July 4 or Christmas) occurs during the week, semiweekly depositors have an extra day to make their tax payment.
Most employers file Tax Form 941 every quarter with the IRS. It compares federal payroll taxes owed with taxes paid during the quarter to determine whether your payments were timely and whether you have a balance due.
All employers provide Form W-2 to each employee at year end as an earnings record for income tax filing purposes. You also are responsible for filing Form W-2 and Form W-3 with the Social Security Administration.
Unlike other federal taxes, FUTA taxes are paid on the last day of the month following the end of each quarter:
- April 30 (for Q1)
- July 31 (for Q2)
- Oct. 31 (for Q3)
- Jan. 31 (for Q4)
If you accrue less than $500 of FUTA liability in a quarter, you do not need to make a deposit until the following quarter. If your liability remains under $500 for the entire year, you can make a single payment at the end of the year (on or before Jan. 31).
All employers who pay FUTA file tax form 940 at year end with the IRS. Like Form 941, it compares FUTA tax liability with FUTA tax payments to determine whether your deposits were timely and whether you have a balance due.
Paying and Reporting State Taxes
Like the IRS, states have established deposit schedules for paying income tax you've withheld from your employees' paychecks. We can’t begin to cover these "individual statement" requirements in this article, the state taxation or revenue agency can provide you with your state’s deposit schedule.
State Unemployment Insurance (SUI) taxes are remitted once a quarter, regardless of the employer's size. In addition, other taxes administered by a state's unemployment commission, such as Arizona's Job Training Tax or New York's Reemployment tax, tend to be paid jointly with the SUI tax on a quarterly schedule.
In states such as Florida and Nevada, where there are no state taxes withheld from employees' wages, SUI is the only payroll tax employers pay, so all employers pay taxes quarterly.
Reports wages paid to each employee for a given quarter. They are sometimes combined with a quarterly contribution report that calculates SUI tax owed and typically is accompanied by the SUI payment at quarter end.
Most states require both a wage report and a contribution report each quarter, either as separate forms or as a combined form. Many states also require a quarterly reconciliation for state income tax. Some states require filing an annual reconciliation for income tax at the end of the year. This might or might not be accompanied by copies of employees' W-2s.
Summary
Hopefully, this will give you enough starting details to get you going. Since you're using an Intuit QuickBooks Payroll product, training maybe available by contacting a local ProAdvisor. Otherwise visit with your company’s accountant or whoever prepares the company's business tax returns.
DISCLAIMER: This article is for informational purposes only and does not constitute tax or payroll liabilities advice, if you need tax or payroll liabilities advice you should consult an accountant or tax professional. While the information in this article was timely at the time of publication, Insightful Accountant assumes no liability for any misapplication of content or any changes to content provided herein, at anytime.