What Is Payroll Tax?: The Basic Facts All Employer’s Should Know
Have you started your own business and are now hiring employees? Being a business owner has its perks. You get to be your own boss, though as the owner and operator, you will be someone else’s boss.
Employing workers comes with its own particular legal and financial issues.
If you have employees on your payroll, withholding the federal payroll tax from the wages of your workers is your responsibility. You are also responsible for payment of each employee from your earnings.
What is payroll tax? Read on to learn more about it.
What Is Payroll Tax
withholdings in a paycheck that contribute to Federal Insurance Contributions Act (FICA). These taxes fund Social Security and Medicare.
The difference between these taxes and the U.S. income tax is that income tax withholdings contribute to the U.S. general fund.
How Does Payroll Tax Work
Employers deduct payroll taxes from employee wages and tips. It is the employer’s responsibility to pay these collections directly to the I.R.S. These payments are often made bi-weekly or monthly, though some pay quarterly.
As the employer, are also required to contribute to these payroll taxes for each employee.
It is also necessary for you, the employer, to calculate and deduct federal income, state, and local taxes from your employee’s wages or tips.
Aside from knowing what is a payroll tax, you must know the current payroll tax withholding rates.
For Social Security, 6.2% of an employee’s gross wages are withheld. The employer contributes an equal amount.
The current rate for Medicare is an equal split of 2.9 percent, meaning employer and employee each contribute 1.45 percent.
As an employer, you must contribute to the Federal Unemployment Tax Act (FUTA). This tax funds federal unemployment insurance.
This is a tax you contribute alone for every employee, and the current rate is six percent of the wages paid to an employee per quarter with a base pay of 7,000 dollars.
While this may seem complicated, there are ways to make this accounting easier. Consider investment in a quality pay stubs maker. These programs developed by professional accountants calculate withholdings and payments.
Payroll Tax Relief
Due to the ongoing hardships faced by employers and employees during the ongoing Covid-19 pandemic, President Trump initiated a payroll tax holiday through an executive order.
If, as an employer, you decide to opt into this deferral, you are not obligated to deduct the 6.2 percent for Social Security from your employee’s pay for the last quarter of the 2020 calendar year.
Be aware, though, that as of now this executive order is merely a deferral. You should also know this does not relieve you of your tax obligations as an employer.
The Importance Of Payroll Tax
You now know that payroll taxes are payments made by employer and employee that fund important social programs like Social Security and Medicare.
The employer must calculate and deduct these withholdings. While that may sound complicated, there are programs available to help ensure you are deducting properly and paying on time.
For more helpful financial information, please consult the rest of our website.