Payroll Taxes: What They Are, When They’re Due, and How To Calculate Them
Payroll is already a pretty dense subject. When you combine payroll with taxes, the jungle of acronyms, rates, forms, and questions to sort through can be downright intimidating. You might be afraid to ask basic questions like:
- What are payroll taxes?
- When are they due?
- How can you calculate and file them?
Hiring a certified payroll specialist and using payroll software can help simplify a lot of these questions for your organization. But if you don’t have those resources, or if you just want to know a little more about payroll yourself, this guide will help you navigate payroll taxes.
What Are Payroll Taxes?
Payroll taxes are taxes that are withheld from an employee’s paycheck and paid to the government to fund federal programs like social security and Medicare. These taxes appear as an itemized list on an employee’s paystub and include FICA (Federal Insurance Contributions Act), MEDFICA (Medicare), as well as federal and possibly state income taxes.
As of 2020, the tax rate is 6.2 percent for social security and 1.65 percent for Medicare, for a total of 7.65 percent. An employer must match what the employee pays, so in all, payroll taxes are 15.3 percent of an employee’s salary, wages, and tips. These funds go straight to the federal government to help pay for:
- Children and spouses of deceased workers
- Disability benefits
- Medical benefits for the elderly
Your organization’s payroll taxes also include FUTA (Federal Unemployment Tax Act), although this tax is paid only by the employer. As of 2020, the FUTA tax rate is 6 percent on the first $7,000 your organization pays to an employee during the year (your state’s wage base might be different from this $7,000).
Here’s the good news from the IRS: You can take a credit of up to 5.4 percent of these taxable wages if you pay “your state unemployment taxes in full, on time, and on all the same wages that are subject to FUTA tax”—which means your organization will really only be paying a 0.6 percent rate for federal unemployment taxes if you qualify for the full credit.
These rules can vary from state to state, and you’ll want to check in with a payroll specialist to make sure your company follows all of the correct regulations for where you’re located.
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When Are Payroll Taxes Due?
Payroll taxes are due for deposit on either a monthly schedule or a semiweekly schedule. This schedule depends on “the total tax liability you reported on Form 941 during a lookback period,” according to the IRS. Let’s break this down into plain English:
- Total tax liability- If your organization’s Form 941 total tax liability was $50,000 or less, you will likely be on a monthly schedule; if it was more than $50,000, you’ll probably be semiweekly.
- Form 941- This form is used to report income, social security, and Medicare taxes, as well as to pay the employer’s portion of social security or Medicare tax.
- Lookback period- This is a four-quarter period from the previous year that starts July 1 and ends June 30. For 2020, the lookback period would be July 1, 2018–June 30, 2019.
- If you’re a brand new employer and don’t have a lookback period (meaning you didn’t pay payroll taxes during that period), then you start out on a monthly deposit schedule.
When it comes to paying FUTA taxes, you’re looking at a whole different schedule. FUTA deposits are due by the last day of the first month of each quarter (January, April, July, October) if the total amount owed is over $500.
If you’re a small business owner, this might not be the case: If you owe less than $500, then your organization may not have to pay until the next quarter. You can carry this over to the end of the year or until you owe at least $500.
Hopefully, this gives you an idea of when payroll taxes are due for your organization, but you should always check with a certified payroll specialist to be sure.
Who Is Responsible for Payroll Taxes?
Employers are responsible for handling all required payroll taxes including:
- Social security (6.2 percent; the other half comes from employee wages)
- Medicare (1.45 percent; the other half comes from employee wages)
- Federal unemployment
- State unemployment
They are also responsible for withholding money from employee paychecks as designated on each employee’s W-4 form to pay federal, state, and local income taxes, plus the amount an employee owes in FICA taxes.
If your organization is ever late on payroll taxes, you will likely face a “failure to deposit” penalty that is calculated based on the amount of money you owe and the number of days you are late:
- 1-5 days late= 2 percent
- 6-15 days late= 5 percent
- 16 or more days late= 10 percent
- More than 10 days after the first IRS bill= 15 percent
In addition to these penalties, your organization will also probably have to pay interest or other fines based on your specific circumstances.
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In the event of a failure to pay payroll taxes at all, individuals within an organization may be held personally responsible. This is according to a rule known as the trust fund penalty or the 100-percent penalty. The gist is that if an organization fails to pay the proper payroll taxes, the IRS can hold a single person or a group of people responsible for the full amount that is owed. Such a person must be “responsible for collecting or paying withheld income and employment taxes” and “willfully fail to collect or pay the taxes.” In many cases, this person may be the head of a company, but the rule can also apply to:
- An officer or employee of a corporation
- A member or employee of a partnership
- A corporate director or shareholder
- A trustee of a not-for-profit organization
- Someone with authority and control over funds to direct their disbursement
- Another corporation or third-party payer
- Payroll service providers (PSP)
- Professional employer organizations (PEO)
Long story short, it’s best to avoid getting tangled up with the IRS in the first place—but you probably already knew that! Using payroll software and a certified payroll specialist is the best way to ensure your organization pays all payroll taxes on time and in the right amount so you can move forward headache-free.
How to Calculate Payroll Taxes
We’ve reviewed some of the base rates for payroll taxes already, but let’s lay them all out so you have an idea of how to calculate payroll taxes for your organization. Some of these funds you will withhold from employees’ paychecks while others you will pay as an employer. Here are the taxes you should factor in per employee:
- 6.2 percent of the employee’s wages for social security that your org pays
- 6.2 percent withheld from the employee’s paycheck for social security
- 1.45 percent of the employee’s wages for Medicare that your org pays
- 1.45 percent withheld from the employee’s paycheck for Medicare
- 6 percent of the first $7,000 of an employee’s wages for the year for FUTA
- Your state’s tax rate for state unemployment
- Withheld amount as designated by the employee’s W-4 form
Fortunately, you don’t have to memorize all these rates yourself. There are numerous payroll tax calculators online, and the best payroll software providers can help you sort through all the rules and regulations as well.
How to File Payroll Taxes
According to the IRS, you have to make all federal tax deposits with an electronic funds transfer, or EFT. You can use the Electronic Federal Tax Payment System (EFTPS), a free service from the Department of the Treasury, to make these deposits, or your payroll software provider can make electronic deposits on your behalf.
Here’s how to file payroll taxes broken down into steps:
- Calculate what should be withheld from the employee’s paycheck for federal and state income taxes, as well as FICA taxes.
- Calculate what you owe in FICA taxes as an employer as well as FUTA taxes (and SUTA is applicable).
- Pay the amount owed for FICA taxes to the IRS according to your deposit schedule (either monthly or semi-weekly) with an EFT.
- Pay the amount owed for FUTA on a quarterly basis, unless your organization owes less than $500 (as we noted earlier).
- Report your FICA payroll taxes on a quarterly basis with Form 941.
- Report your FUTA payroll taxes on an annual basis with Form 940.
- Report your state payroll taxes according to your state’s schedule and rules.
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Does your brain feel a bit mushy yet? It’s a lot of information to navigate, which is why it’s always a good idea to get back-up. A certified payroll specialist and a reliable payroll software provider can help you make sense of the deadlines, tax rates, and more that apply to your organization so you can do payroll (and payroll taxes) the right way every time.