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Deciphering Payroll Taxes: Navigating State and Federal Withholding

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By 2023, an estimated 22 million Americans will be working from home, and many of them are enjoying the freedom that comes with independence from a fixed work location. What does this mean for the future of payroll accounting?

It's easy if your employees live in the same state as your company, but that's not always the case. Many companies employ people in neighboring states and beyond, searching far and wide for the talent they need to succeed as a business.

Payroll accounting is already a very complex topic. If you then combine payroll accounting with taxes, the jungle of abbreviations, rates, forms and questions that need to be sifted through can be downright confusing.

Hiring a certified payroll professional and using payroll software like IceHrm can simplify many of these questions for your business. However, if you don't have these resources or just want to know a little more about how to handle payroll yourself, this guide will help you tackle payroll like a pro.

What are payroll taxes?

Payroll taxes are deductions withheld from employees' paychecks and paid to the government to fund various programs such as Social Security and Medicare. They are levied on wages, tips and other forms of compensation and appear as an itemized statement on the employee's pay stub each pay period and on Form W-2, the wage and tax statement, at the end of each year.

Payroll providers typically use different codes for each tax deduction to make it easier for employees to read their paystubs. These vary from provider to provider, but you may have seen one of the following payroll tax abbreviations:

  • OASDI or SS: Social Security Tax
  • MEDI or MedFICA: Medicare tax
  • FWT: Federal income tax
  • SWT: State Income Tax

Payroll taxes vs. employment taxes

Sometimes the terms "payroll tax" and "employment tax" are used to describe specific types of deductions. In this article, all taxes for which employers are responsible when processing payroll are generally referred to as "payroll taxes."

4 types of payroll taxes every employer should know

Payroll taxes are regulated by federal, state and local laws and calculated at specific rates. Your company is responsible for deducting these taxes, even if it is not involved in paying them. Below you will find a breakdown of the individual types of income tax and their meaning:

1.FICA (Social Security and Medicare Taxes)

Social Security and Medicare taxes fall under the Federal Insurance Contributions Act, or FICA. The money collected from FICA payroll taxes goes directly to the federal government to fund benefit programs for retirees, survivors of deceased workers, people with disabilities and other qualified individuals.

Employers and employees share this responsibility and each pay 7.65%. The Social Security tax applies to wages and salaries up to the current cap ($168,600 for 2024), and the Medicare tax applies regardless of the employee's income.

2.Taxes on Unemployment Insurance (UI)

Your company's payroll taxes also fund the federal Unemployment Insurance Program, which supports eligible workers and their families after they lose their jobs. Tax rates for UI programs include:

  • Federal Unemployment Tax Act (FUTA): Employers pay FUTA taxes, which apply to the first $7,000 your company pays to an employee during a calendar year. Employers typically receive a FUTA tax credit, resulting in a lower net payment than the standard percentage.
  • State Unemployment Tax Act (SUTA): SUTA taxes go to each state's unemployment fund. In most states, only employers are required to pay SUTA taxes, but a handful of states also require employees to pay into the program.

3.Withholding of personal income tax

Income tax is withheld directly from your employees' paychecks, but you are responsible for withholding and remitting the tax on their behalf. The exact amount depends on the individual employee. To find out how much income tax you need to withhold, use Form W-4.

Federal income tax is dependent on wages, You pay more the more you earn. State income taxes vary - some states have no income tax, others have a flat tax, but most have a sliding scale tax rate.

4.State and local payroll taxes

Some states require additional tax deductions. An example of this is New York State. Employers in New York withhold payroll taxes for state disability insurance and paid family leave. Additionally, there are some local tax rules that apply only to employees in New York City and Yonkers.

Payroll Tax Withholding for Remote Employees

As an employer, you are responsible for ensuring that all required payroll taxes for your employees are correctly paid - including tax deductions for remote employees. Federal payroll taxes are pretty straightforward because they apply regardless of where your employees live in the United States. But in most cases, employees working abroad are subject to the tax laws of their respective states.

Be prepared to comply with the tax regulations of your business's location and the location of your remote employees. If your workforce spans multiple states, a payroll expert can help ensure your payroll process is compliant with each jurisdiction.

Do I have to withhold payroll taxes for independent contractors?

The short answer is: no. Freelancers and other self-employed people are not classified as employees and are therefore responsible for paying self-employment tax (SE tax) and other taxes. If your company partnered with independent contractors and paid them $600 or more, you must report the payments made to those individuals on Form 1099-NEC.

When are payroll taxes due?

Payroll taxes for Social Security, Medicare, and federal income are generally due monthly or semi-weekly (with one exception, of course). This means that your tax deposit due dates can be any of the following:

  • Monthly deposits are due by the 15th of the following month.
  • The semi-weekly dues fall on a Wednesday or a Friday, depending on the payday.
  • Next-day tax deposits are required by the next business day regardless of your regular tax deposit schedule if you deposit $100,000 or more in taxes.

Before the tax year begins, think about which schedule you want to use. According to the IRS, the schedule for depositing payroll taxes depends on the total tax liability you reported on Forms 941, 943, 944, or 945, as well as your lookback period (a specific four-quarter period of the prior year).

Tip for new business owners: If you are a brand new employer, you probably don't have a retroactive period (you didn't pay any employment taxes during that period). In this case, you start with a monthly deposit plan.

FUTA tax due dates

FUTA taxes, on the other hand, are typically deposited quarterly, but they are based on your tax liability. If the total amount owed is more than $500, it is due by the last day of the first month following the end of each quarter, or:

  • 2024 Q1 Due Date: April 30, 2024
  • 2024 Q2 Due Date: July 31, 2024
  • 2024 Q3 Due Date: October 31, 2024
  • 2024 Q4 Due Date: January 31, 2025

However, as a startup or small business owner, this may not be the case. If you owe $500 or less, your company may not have to pay until the next quarter. Simply carry this amount over to the next quarter and pay the entire amount by the next due date (if it meets the minimum amount).

State tax due dates

Just like tax rates, tax filing deadlines vary from state to state. Many states have quarterly tax deadlines, but check your state's website for the most up-to-date information.

If your company files payroll taxes late or inaccurately, you will likely face a non-filing penalty and other costly consequences. Using payroll software and a certified payroll professional is the best way to ensure your business avoids common payroll mistakes so you can move forward without headaches.

Submitting income tax returns

You can report and remit your federal payroll taxes according to your state's schedule and regulations. However, all federal tax deposits must be made by electronic funds transfer (EFT) through the Electronic Federal Tax Payment System (EFTPS). This is a free service provided by the U.S. Department of the Treasury. You can make electronic tax deposits yourself, or your payroll software provider can do it for you.

Below is a general overview of filing federal employment tax returns:

  • Step 1: Determine your tax filing schedule and due dates.
  • Step 2: Calculate how much to withhold from each employee's paychecks.
  • Step 3: Calculate how much taxes you owe as an employer.
  • Step 4: Log in to the EFTPS platform.
  • Step 5: Follow the instructions to make your payment.

For more information about when and how you must pay employment taxes, see IRS Publication 15 (Circular E), Employer's Tax Guide.

There's a lot of information to consider when it comes to payroll, so it's always a good idea to have support. A certified payroll professional and a reliable payroll software provider can help you understand the deadlines and tax rates that apply to your business so you can do payroll right every time.

Navigating payroll taxes, especially with remote work, demands clarity and accuracy. Partnering with tools like IceHrm ensures smooth operations.

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