Payroll Taxes

Accounting: Lesson 10

The owner of Phipps CPA, Jennifer Phipps, will be defining payroll taxes and how they affect employees and employers.

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- Defining Payroll Taxes

Payroll Taxes are taxes that are imposed on wages/salaries that are paid by an employer and received by an employee. The two primary types are Social Security/FICA and Medicare. Social Security is used to fund retirement programs, life insurance for beneficiaries, and to provide assistance to those with disabilities. Medicare has provided hospital services, skilled nursing, and hospice for millions of Americans.

- Employer and Employee Side of Payroll Taxes

Employees have a responsibility to let employers withhold these taxes through the W4 form upon employment. The W4 form will inform your employer how much you would like withheld in income taxes. As an employee you then have the required withholdings which include social security, 6.2% of gross wages, and medicare, 1.45% of gross wages. Employees will keep the above mentioned taxes out of your paycheck which will leave you with net earnings. Employers will then have to match the social security and medicare withholdings totaling 7.65% of your gross wages. This matching will then go into your potential future funding of social security and medicare but will assist current recipients as well.

Employers have the responsibility to remit the withholdings to the IRS and local tax authorities. The frequency of this remittance is dependent upon total wages paid and can occur every paycheck, monthly, or even quarterly. At the same time the employer must file payroll tax returns, which are federal and state, including the remittance of these income taxes, social security and medicare, and often state unemployment taxes.

- Compliance

Compliance means timely filing. Most most payroll tax returns are due quarterly and can be paid one month after the quarter ends. Missing these deadlines will cause severe penalties and interest imposed on these taxation areas. Both the filing and when you give the money up deadlines need to be upheld.

If you would like to take on the filing of these payroll tax returns, be sure to check out these resources:

– irs.gov

– your State’s Department of Revenue

– your State’s Department of Labor Resources

- Don't Forget Credits

There may be opportunities for payroll tax return credits that actually go on your return.
Some credits go through the COVID Pandemic with the recent Cares Act called The employee Retention Credit.
Another big credit opportunity for businesses is called The Work Opportunity Tax Credit.

- Should You Be A 'S Corporation'

As a business one potential planning option would be filing as a S Corporation, which would mean that some of the payroll taxes would not be required. This is because you as the business owner make an investment in your business. You should not have to pay self employment taxes on money you receive back as a distribution.

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