Business Payroll Tax
All employers must report and deposit employment taxes to the Internal Revenue Service (IRS) throughout the year. At the end of the year, employers must prepare and deliver to their employees and file with the IRS a Form W-2, Wage and Tax Statement. This form reports wages, tips and any other compensations paid to an employee by the business entity, as well as the collection and deposit of all taxes withheld from the employee’s paycheck.
Employers are responsible for the collection, reporting and depositing of several taxes. These include:
Federal Income Tax
Social Security and Medicare Tax
Additional Medicare Tax
Federal Unemployment Tax (FUTA)
Self-employment Tax (SE tax)
Employers calculate the amounts to withhold for the federal income tax from employees’ wages according to the charts published by the IRS. These amounts are then deposited by the employer and paid to the IRS. These monies are then used by the government to pay for services that benefit the entire nation, such as the building and maintenance of the infrastructure, governmental services, military and other services that the United States government provides its citizens.
Besides withholding this federal income tax from each paycheck, employers must also withhold part of the Social Security and Medicare taxes from the employees’ wages and then pay an additional matching amount. The employee tax rate for Social Security for 2020 and 2021 is 6.2%. The base limit is $137,700 for 2020 and $142,800 for 2021. These funds provide monies and medical services to retirees.
Since 2013, employers have been responsible for withholding 0.9% Additional Medicare Tax on each of their employees’ wages and compensation that exceeds a threshold amount according to the employee’s filing status. There is no employee match for the Additional Medicare Tax to pay so this tax is paid exclusively by the employer.
Separate from the Federal Income Tax, employers report and pay the Federal Unemployment Tax (FUTA). Since employees do not pay this tax or have it withheld from their pay, the employers must pay the entire FUTA tax from their own funds. Employees who become unemployed can withdraw from this fund. The amount available to the employee is determined by the amount he or she paid into the fund.
For those individuals who work for themselves (are self-employed), there is a self-employment tax (SE tax). This Self-Employment Tax covers Social Security and Medicare benefits for the self-employed. It parallels the Social Security and Medicare taxes withheld from most employees’ paychecks by their employers. These payments contribute to the individual’s coverage under the social security system, which provides the individual with retirement benefits, survivor benefits, disability benefits and hospital insurance (Medicare) benefits. The following individuals must pay the SE tax and file the corresponding form if:
Due to the Coronavirus, Aid, Relief and Economic Security Act (CARES Act). employers are allowed to defer the deposit and payment of the employer’s share of the Social Security taxes. Likewise, self-employed individuals are allowed to defer payment of certain self-employment taxes. The payroll tax deferral period began on March 27, 2020 and ended on December 31, 2020. Employers who received a PPP (Paycheck Protection Program) loan are entitled to defer this payment and the deposit of the employer’s share of Social Security tax even if the loan was forgiven. A tax professional can determine the appropriate application of the CARES Act to any business. Mistakes can be costly in time and money so it is best to leave the application and calculations of all applicable laws and deductions to the tax professionals.
The calculation, withholding and depositing of the Federal Payroll Tax can be complex and complicated. Additionally, the processing of the Social Security and Medicare Tax, the Additional Medicare Tax, the Federal Unemployment Tax (FUTA) and the Self-Employment (SE) Tax can also be stressful. A tax expert can assist with these processes, making the reporting of these taxes accurate and complete. Give us a call today so that we can ensure the accurate withholding of these taxes and their reporting and depositing with the IRS. Visit our tax resolution page for more services.