Payroll taxes can be one of the more confusing responsibilities a business owner faces, but they can't be avoided. It's important for employers to get a grasp on the subject so they can fulfill obligations to both their employees and the government.
Payroll taxes are taxes that employers and employees must pay on wages paid. Employers share of taxes (ER portion) and employees’ taxes (EE portion) are remitted to government agencies.
In this article, we’ll discuss the different types of payroll taxes and the basics of calculating them, payroll tax reporting and payment, and some recent payroll tax changes.
Payroll taxes involve some powerful forces, including the Internal Revenue Service (IRS), Social Security Administration (SSA), and state and local governments. The taxes—also called employment tax—include federal income tax, social security tax, Medicare tax, and state and local taxes.
Calculating payroll taxes can be a daunting task. Payroll software can handle these calculations quickly and accurately. Still, it's good to understand how the numbers are processed. Here are the basic steps for a payroll tax calculation:
Payroll tax reporting and payment are essential responsibilities of employers. Failure to comply with employer payroll tax requirements can lead to serious penalties and fines. In this section, we'll explore the responsibilities of employers when it comes to payroll tax reporting and payment, the deadlines involved and the penalties for non-compliance.
As an employer, you have several responsibilities when it comes to payroll tax reporting and payment. First, you must calculate and withhold the appropriate payroll taxes from your employee’s paychecks, including federal income tax, Social Security tax, Medicare tax, and any state or local employment taxes. You must also match your employees' Social Security and Medicare taxes and make your own contributions to these government programs.
In addition to calculating and withholding federal and state payroll taxes, you must also report them to the appropriate government agencies. This includes filing quarterly and annual payroll tax reports, as well as issuing W-2 forms to your employees each year. You may also be required to make additional payments, such as state unemployment taxes, on a regular basis.
The deadlines for payroll tax reporting and payment vary depending on the type of tax and the size of your business. For example, small businesses may be required to file and pay payroll taxes on a monthly basis, while larger businesses may have quarterly or annual filing requirements.
The IRS and other government agencies typically provide deadlines and due dates for payroll tax reporting and payment, and it's important to keep track of these dates to avoid penalties and fines. Failure to file or pay on time can result in late fees, interest charges and other penalties.
The penalties for non-compliance with payroll tax reporting and payment requirements can be severe. In addition to late fees and interest charges, employers may face fines, legal action and even criminal charges.
For example, if you fail to withhold payroll taxes from your employees' paychecks or fail to make required contributions, you may be subject to a penalty equal to the amount of taxes owed. You may also be subject to penalties for filing late, submitting incomplete or inaccurate information, or failing to provide W-2 forms to your employees.
Payroll tax regulations change on a regular basis, and employers must stay up-to-date to avoid penalties and fines.
The federal government—as well as state and local tax agencies—may make changes to tax rates, wage base limit or caps, income taxes and brackets, and other payroll tax-related rules based on economic conditions, changes in the laws, and other factors.
For instance, the Social Security tax wage base for employees increased for 2023, going from $147,000 to $160,200. Medicare tax also changed, applying to all wages at a rate of 1.45% for both employers and employees. The earnings base for self-employment tax also increased to $160,200 this year with an effective rate of 15.3%.
Employers must keep track of these changes and adjust their payroll processes accordingly to ensure that they are accurately withholding and paying payroll taxes. Failure to comply with payroll tax regulations can result in significant penalties, ranging from fines, interest charged on back taxes, liens against property, civil and/or criminal sanctions, and even jail sentences. Any fees charged will increase the longer the payments are past due.
Employers and self-employed people should keep up with payroll tax changes. They can regularly check government websites and publications, consult with tax professionals and keep records of all payroll tax-related transactions.
Working with an HR service like TriNet can relieve a business of the trouble of handling payroll taxes and keeping up to date with ever-changing rules and regulations. And, as any business owner can appreciate, it can save you time and money in the long run.
With TriNet on your side, we’ll calculate and withhold federal, state and local payroll taxes paid through our platform—and we’ll electronically submit withholdings. We can also handle your payroll administration tax documents, including electronic W-2 preparation and delivery, and employees can choose to import their W-2s directly into TurboTax.® TriNet will even manage unemployment taxes and claims for you.