Employee taxes can be one of the most difficult to understand areas of running a business and hiring employees. If you don’t understand all the complexities involving employee payroll tax, it can also get you into a heap of trouble.
The first employee tax factor you should understand is what taxes you are responsible for as an employer. There are three employee taxes that you will be responsible for paying.
The first is Medicare and Social Security tax. This is often referred to as FICA and provides welfare benefits funding for senior citizens. As an employer, you are responsible for paying half of the FICA taxes and withholdings for your employee while the remaining half is withheld from their paycheck.
You are also responsible for paying federal unemployment tax (FUTA). This tax funds the state unemployment benefits and the administrative costs associated with those benefits. It is important for you to know that you must pay 6.2% federal unemployment tax on the first $7000 earned by each person you employ during the calendar year.
In addition to federal unemployment tax, you must also pay state unemployment tax. These taxes are based on the location and size of your business as well as the number of employees you employ. Since each state operates its own unemployment program, these rates do tend to vary; so, it’s best if you check with your own state’s unemployment division for specific details.
In addition to the taxes you must pay as an employer, you are also responsible for withholding employee tax. Even though this is the employee’s contribution, it is your responsibility to handle the employee tax withholding. You will need to pay close attention to the employee tax form, or W-4, completed by the employee to know exactly how much money you need to deduct from the employee’s paycheck. Usually the amount of money you must withhold will depend on the number of withholding allowances claimed by the employee, their marital status and any exemption from withholding taxes that the employee might claim.
It is very important that you stay on top of your employee’s tax forms because they have the right to change them by submitting a new W-4. If an employee submits a new employee tax form, thereby changing the amount of their withholding and you fail to deduct the correct amount of money, you could be subject to penalties by the IRS.
You will need to deposit both the taxes that you are responsible for paying along with the employee tax withholdings in an authorized depository for Federal taxes. These taxes will be due either semi-weekly or monthly. Your employee tax withholding due dates will be determined by the size of your payroll, dictated by the schedule. Usually, however; if your payroll is less than $2,500 every three months, you can file quarterly. If your employee taxes are larger, you’ll need to file more often.
As most employers know, employee taxes can be a real headache. Unfortunately, the employee payroll tax problem is a headache that simply must be endured. With a little understanding and careful attention to detail; however, the hassle of filing employee tax withholdings can be a little less of a bother.
While death and taxes are the only thing certain in life, you can make the latter a little less painful by using a virtual bookkeeping team who is on top of all the intricacies of taxes, deadlines, and law changes. The Bean Counters Bookkeeping team can make sure you’re compliant, on time, and help you get a better picture of your business’s financial picture.
Reach out today and let’s chat.