What to know about Payroll Taxes in The U.S.
A payroll tax is a percentage deducted from an employee’s salary and paid to the government on the employee’s behalf by the employer. Payroll taxes include wages, salaries and tips paid to workers.
In many countries, including the United States, federal authorities and some state governments collect payroll taxes in addition to income taxes.These payroll tax deductions are listed on an employee’s pay stub. The list notes how much is withheld for federal, state, and municipal income taxes and the amounts collected for Medicare and Social Security payments.
In the U.S., federal payroll taxes refers to the taxes deducted to fund Medicare and Social Security programs. Federal payroll taxes are taken from the employee’s wages and is paid directly to the Internal Revenue Service (IRS). The Federal income tax, which is also withheld from employee paychecks, enters into the U.S. Treasury’s general fund.
If you run a business with one or more employees, you are responsible for deducting a percentage of the employee’s wages to pay certain taxes on their behalf. Also, you are responsible for paying roll taxes on each of your employees out of your own business earnings.
Your payroll tax payment schedule will be determined by your employer history and the amount of total payroll taxes you collect.
Which taxes are included?
FICA tax: This tax stands for the Federal Insurance Contributions Act and is deducted from each paycheck. This cost is shared by the employer and his employee. The employer part is about 6.2% for social security and 1.45% for medical care, the employer should collect the same amount from his employee’s earnings. Did you know? Nearly 171 million workers are covered under Social Security. This type of tax helps fund Social Security and Medical Care programs, which provides benefits for retirees, the disabled and children.
FUTA tax: Unemployment insurance is covered with this type of Tax. Most employers pay both a Federal and a state unemployment tax. The overall percentage is 6.0 percent. Most states, however, have a 5.4 percent credit, which means that most employers only pay 0.6 percent.
Federal Income Tax:
As an employer, you are responsible for withholding income tax on behalf of your employees and remitting those taxes to federal, state, and local tax authorities on a quarterly basis. The amount to deduct is calculated by combining the number of deductions declared by the employee on the W-4 form with the Internal Revenue Service’s tax tables (IRS).
Other taxes includes:
Medicare tax withholding about 0.9% for employees earning more than $200,000. It also includes state income tax withholding and other local tax withholdings, like city, county, or school district taxes; state disability; or unemployment insurance.
If you don’t have employees, because you run a small business, you will still have to remit payroll taxes. In that case payroll taxes will include Social Security for yourself and Medicare. This is about 15.3% of your net business income.
What are payroll voluntary deductions?
If the employee has agreed to the deduction, voluntary payroll deductions can be withheld from his/her paycheck. This type of deductions contribute toward different benefits that the employee has elected to participate in. Pre-tax or post-tax dollars may be used to pay for voluntary deductions, it will depend on the type of benefit that’s being paid for. Some pre-tax deductions reduce only federal income tax-exempt wages, while others reduce salaries that are subject to Social Security and Medicare taxes as well.
Voluntary deductions include:
- Life insurance premiums
- Health insurance premiums that include dental and eye care
- Plan contributions for retirement
- Employee stock purchase plans like as ESPP and ESOP plans
- Other job-related expenses
There are a number of errors that business can make in a process as complex as payroll. All these errors are easily avoidable with proper planning, the right expert by your side and of course with the right tools.
The most common mistake is misclassifying employees, like labeling them as independent contractors or as exempt. Not only a misclassification can deny an employee of significant benefits and salaries, but it can also result in the government losing money.
Miscalculating pay is another common mistake. If you don’t have a credible system in place to track employee hours or paid time off, your chances of making a payroll overpayment or underpayment error rise exponentially.
How to avoid payroll payment mistakes:
- Be sure about to who to pay and how much to pay them
- Return to the government any withheld taxes
- Pay all your employees, accurately and on time
- Keep accurate records
Finding the right expert who can help you to calculate your payroll taxes is important. Our Advanced Team has the experience you need in this type of matter. There are many ways to lower taxes. A financial advisor can help you find the best strategy for your financial goals and needs. If you are self-employed, we can also help you with the right estrategy to pay your taxes and save you money.