Payroll Taxes and Deductions
Stay up-to-date with your legal requirements as an employer
Need information about payroll taxes? The employer must withhold payroll taxes from an employee's paycheck to comply with government regulations. The employer first determines the total amount of salary that the employee earned during the time period covered by the paycheck.
Employer Payroll Tax Responsibilities
From this total pay which is known as gross pay, the employer is required by law to withhold certain percentages of an employee's paycheck to pay required tax withholdings. After voluntary payroll deductions are subtracted and legally required payroll deductions are subtracted, the pay that the employee receives is called their net pay.
The employer must report withholdings to government agencies. The employer must also pay both his or her share of the payroll tax withholdings and deposit the employee's withheld taxes to the requisite government agencies using the appropriate forms.
Additionally, according to William Perez, the taxes expert for The Balance.com, the employer is responsible for "preparing various reconciliation reports, accounting for the payroll expense through their financial reporting, and filing payroll tax returns." See the linked article for a list of the reporting requirements and the appropriate forms.
Payroll Tax Deductions
The payroll taxes that must be collected and paid by the employer include:
- Federal income tax,
- Social security taxes,
- Medicare tax withholding,
- State taxes, and
- Local (city, county) income tax withholding in some areas. (Other local taxes can include school district taxes, community college taxes, state disability or unemployment insurance, for example.)
Federal, state and local income taxes are subtracted from the employee's gross pay by the employer. The amount to subtract is determined by using the number of deductions declared by the employee on the W-4 form in conjunction with the tax charts provided by the Internal Revenue Service (IRS). See Taxes 101 for additional information about taxes.
Social Security and Medicare tax withholding are subtracted from an employee's gross pay by the employer. Known as FICA (Federal Insurance Contributions Act) taxes, they are paid by both the employee and his or her employer. Currently, the following tax percentages that add up to 15.3% are paid:
- Social Security: both the employer and the employee pay 6.20 percent of the employee's gross pay as of 2016 on earnings up to the applicable taxable maximum amount, $118,500 in 2016. This includes no increase over 2015 as there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2014 to the third quarter of 2015. Note that individuals who are self-employed are responsible for paying the full amount.
- Medicare: both the employer and the employee pay 1.45 percent on all earnings with no maximum. (If an individual is self-employed, he or she pays the whole amount.)
Additional Resources for Employers About Payroll Taxes
US Business Law and Taxes expert, Jean Murray has put together a comprehensive guide for employers about payroll taxes.
She covers how to calculate taxes, when to pay taxes, forms to use, how to pay taxes, the employer's responsibilities about reporting to the IRS, and more. You'll want to take a look so that you comprehensively understand your legal responsibilities as you pay your employees.
Depending on your state and locality, you may check the map by state that is provided by the American Payroll Association. Links are provided to all tax reporting requirements based on your location.
Because the US tax laws are so confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
Also Known As FICA taxes