Employee taxes can be among the most difficult to understand when running a business and hiring employees. If you don’t understand 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 your employee’s FICA taxes and withholdings while the remaining half is withheld from their paycheck.
You are also responsible for paying federal unemployment tax. This tax funds the state unemployment benefits and the administrative costs associated with those benefits. You need to know that you must pay federal unemployment tax on the first $7000 earned by each person you employ during the calendar year.
In addition to the federal unemployment tax, you must also pay the state unemployment tax. These taxes are based on the location and size of your business and the number of employees you employ. Because each state operates its unemployment program, these rates tend to vary, so it’s best to 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, you must 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.
You must stay on top of your employee’s tax forms because they can 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 you are responsible for paying and the employee tax withholdings in an authorized depository for Federal taxes. You can do this by either mailing or delivering your check or money order. 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 more significant, you must file more often.
In addition to the employee taxes named above, recently, there has been much discussion in the media regarding a proposed employee health tax. If instituted, this tax would impose a $3000 tax on employers for each employee not covered by health insurance. The proposed bill intends to force employers to cover more employees with health insurance; however, critics claim that the proposed employee healthcare tax will only lead to more unemployment.
Summary: As most employers know, employee taxes can be a real headache. Unfortunately, the employee payroll tax problem is a headache that must be endured. However, with some understanding and careful attention to detail, filing employee tax withholdings can be a little less complicated.