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All about federal payroll taxes: what they are, how much they cost, and how to pay them

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All about federal payroll taxes: what they are, how much they cost, and how to pay them

Updated: March 27th, 2020

All about federal payroll taxes: what they are, how much they cost, and how to pay them

Think back to your first real job. Perhaps you were in high school or college, and you’d already multiplied your hourly rate by how many hours you worked. But when you got your check, you were shocked to see a lot of money was missing.

Your employer likely withheld payroll and income taxes from your pay and passed the money on to the government. It was the company’s responsibility to withhold that money and pay those taxes. Now, as the owner of a business, it could be your responsibility as well. (Give your young employees a heads up.)

What are employment taxes?

There are several types of federal employment taxes that your business may be responsible for paying:

  • Federal income tax. You’re likely familiar with income tax, as it’s the tax you pay on the income you earn each year. While employees are financially responsible for their income tax, you may need to withhold and send payments to the IRS throughout the year.
  • Social Security and Medicare taxes (FICA taxes). Social Security taxes fund Social Security benefits that help retirees and people with disabilities, along with their dependents. Medicare taxes fund medical benefits for qualified people who are 65 or older. Combined, these are called Federal Insurance Contributions Act (FICA) taxes.

    Both employers and employees pay a portion of this tax. However, there are employee exemptions for students working at the school where they study, undocumented workers, and members of certain religious groups.
  • Federal unemployment taxes. Employers are responsible for the entire Federal Unemployment Tax Act (FUTA) tax payment. This means you won’t withhold this money from an employee’s paycheck, but you’ll still need to calculate the amount and pay the FUTA tax.

    You may have to pay FUTA taxes if you paid $1,500 or more in wages during a calendar quarter in the current or previous year, or you had an employee who worked for you at least one day during 20 or more weeks in the current or previous year.

How much do you have to withhold and pay?

It’s up to you as an employer to determine how much money you need to withhold from each paycheck. Fortunately, payroll software will generally do the number-crunching for you, but here’s what goes into the calculations:

  • Federal income tax. The amount of money you should withhold for income taxes depends on the employee’s income and the information on their Form W-4.
  • FICA taxes. Each of the FICA taxes for Social Security and Medicare gets split in half, with employers and employees paying an equal share. As of 2019, Social Security taxes are 6.2% each (for a total of 12.4%) on the first $132,900 an employee makes. Neither the employer nor employee have to pay additional Social Security taxes on earnings above that point.

    The Medicare tax rate is 1.45% each (2.90% total) on an employee’s total pay. There’s also an additional 0.9% Medicare tax that employees who make $200,000 or more pay ($250,000 if they’re married and filing jointly, or $125,000 if they’re married and filing separately). Employers have to withhold and submit this additional Medicare tax to the IRS, but they don’t pay a matching portion.

    If you’re self-employed and your business is a disregarded entity, such as a sole proprietorship or an LLC without a corporate election, you may have to pay both the employer and employee portion. However, you won’t have to pay these taxes until you file your annual tax return, where they’ll be calculated as your self-employment tax.  
  • Federal unemployment taxes. The federal unemployment tax rate is 6.0%, which you pay on the first $7,000 you paid each employee during the year. However, you may also have to pay a state unemployment tax assessment (SUTA). If you paid your state unemployment taxes on time, you’ll receive a credit worth up to 5.4% of the FUTA tax.

    In other words, you may have to pay as little as $42 or as much as $420 in FUTA taxes for each employee. The reduction amount depends on whether your state is repaying money it borrowed from the federal government to pay state unemployment insurance claims. In 2018, only businesses in the U.S. Virgin Islands weren’t able to take the full 5.4% reduction.    

In addition to federal payroll tax responsibilities, businesses may need to withhold and submit local or state taxes, such as income, unemployment, or disability taxes. As with federal taxes, the employees pay for their state income taxes, while the other employment taxes might be a shared or employer responsibility.

When do you pay payroll taxes?

Income and FICA taxes should be withheld and paid on either a semi-weekly or monthly basis. You’ll need to figure out how often you have to deposit the taxes before the start of each year and stick with that schedule for the rest of the year.

Whether you have to use the semi-weekly or monthly payment schedule will depend on how much your business owed in taxes during previous years. Review Publication 15 and look for the section on “when to deposit” to determine your schedule.  The monthly schedule, which may be more common for small businesses, requires you to make payments by the 15th day of the next month (e.g., pay February’s payments by March 15).

If you owe at least $500 in FUTA taxes during a quarter, you must pay the tax by the end of the month after the quarter ends. However, if you don’t owe $500 or more, your tax liability rolls over to the following quarter. The rollover can continue all year, especially if you don’t have many employees and are eligible for a credit reduction. If this happens, you’ll have to pay however much you owe by January 31 of the following year.

Withholding and paying employment taxes is an important part of the payroll process. Your payroll software may have built-in tools that can calculate and electronically send your payroll tax payments. Alternatively, you can use the Electronic Federal Tax Payment System (EFTPS) to submit payments on your own.

What happens if you miss payroll tax payments?

Missing payroll tax payments is a serious offense. You may have to pay a large penalty based on how much you underpaid and how late your payment is. The failure to deposit penalty amounts are:

  • One to five days late: 2%
  • Six to 15 days late: 5%
  • 16 or more days late: 10%
  • 10 or more days after receiving an IRS bill: 15%

If you also don’t file associated tax forms and pay any taxes you owe, you may have to pay additional penalties and interest.

Small business owners who manage their company’s payroll should be extra careful to withhold and submit payroll tax payments. When you’re withholding money from an employee’s paycheck, you’re holding the money “in trust” until you send it on to the IRS.

Special rules apply to these trust funds. The Employment Taxes and the Trust Fund Recovery Penalty (TFRP) allows the IRS to hold a responsible person (which could be you) personally responsible for the money. In other words, even if you’ve registered an LLC or incorporated, the IRS may be able to “pierce the corporate veil” and take your personal assets. The IRS may even be able to bring criminal charges against you, which could result in jail time.

If you can’t afford to make pay your portion of the business tax payments, you should still file your business tax returns and forms on time to avoid additional penalties. You might also be able to work with the IRS to set up a payment plan, defer your payments without getting penalized, or settle for less than you owe. The options may vary based on your circumstances, and you may want to hire a professional tax attorney if you need guidance.

Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.

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