Payroll Taxes

How to Calculate and Report Your Employees Payroll Taxes

Snap shot of a payroll ledger and a federal withholding tax table.
© DNY59 / E+ / Getty Images

Generally, employers report payroll by calculating gross monthly wage earning and then various payroll deductions to arrive at net pay. While this seems simple enough to understand, calculating various payroll deductions requires that the payroll accountant be detail oriented and work with extreme accuracy.

Basic Formula for Net Pay:
Employee's gross pay (pay rate x hours worked)
minus Statutory payroll tax deductions
minus Voluntary payroll deductions
equals Net Pay.

Statutory Payroll Tax Deductions

Payroll taxes must be withheld from an employee's paycheck. This is required by law. Employers must hand these withholdings over to various tax agencies. Payroll tax deductions include the following:

  • Federal income tax withholding (based on withholding tables in Publication 15)
  • Social Security tax withholding (6.2% up to the annual maximum)
  • Medicare tax withholding (1.45%)
  • Additional Medicare tax withholding (0.9%) for employees earning over $200,000 (this is a new tax withholding requirement starting in the year 2013)
  • State income tax withholding
  • Various local tax withholdings (such as city, county, or school district taxes, state disability or unemployment insurance).

Voluntary Payroll Deductions

Voluntary payroll deductions are withheld from an employee's paycheck only if the employee has agreed to the deduction. Voluntary deductions pay for various benefits which the employee has chosen to participate in.

Voluntary payroll deductions include the following:

  • Health insurance premiums (medical, dental, and eyecare)
  • Life insurance premiums
  • Retirement plan contributions (such as a 401(k) plan)
  • Employee stock purchase plans (ESPP and ESOP plans)
  • Meals, uniforms, union dues and other job-related expenses

Voluntary deductions can be paid with pre-tax dollars or after-tax dollars, depending on the type of benefit being paid for.

For pre-tax deductions, some reduce wages subject to the federal income tax, while other deductions reduce wages subject to Social Security and Medicare taxes as well. To determine which benefits are pre-tax for various taxes, see Publications 15 and 15-B. Professional grade payroll software will help you keep track of all the tax-related payroll calculations.

Employer Payroll Tax Responsibilities

The responsibility for payroll taxes continues even after paychecks have been issued to employees. The company is responsible for:

  1. Paying the employer's share of payroll taxes;
  2. For depositing tax dollars withheld from the employees' paychecks;
  3. Preparing various reconciliation reports;
  4. Accounting for the payroll expense through their financial reporting;
  5. And filing payroll tax returns.

Employer Payroll Taxes

Companies are responsible for paying their portion of payroll taxes. These payroll taxes are an added expense over and above the expense of an employee's gross pay. The employer-portion of payroll taxes include the following:

  • Social Security taxes (6.2% up to the annual maximum)
  • Medicare taxes (1.45% of wages)
  • Federal unemployment taxes (FUTA)
  • State unemployment taxes (SUTA)

FICA Taxes

FICA stands for the Federal Insurance Contributions Act.

The FICA tax consists of both Social Security and Medicare taxes. Social Security and Medicare taxes are paid both by the employees and the employer. Both parties pay half of these taxes. Employees pay half, and employers pay the other half. Together both halves of the FICA taxes add up to 15.3%. The 15.3% FICA tax is broken down as follows:

  • Social Security (Employee pays 6.2%)
  • Social Security (Employer pays 6.2%)
  • Medicare (Employee pays 1.45%)
  • Medicare (Employer pays 1.45%)

Starting in 2013, there's an additional Medicare tax applied to employee's whose Medicare wages exceed $200,000. This is an employee-only tax, there's no corresponding tax imposed on the employer.

For 2011 and 2012, the employee portion of Social Security was reduced to 4.2% instead of 6.2%. This payroll tax holiday was legislated as part of the Tax Relief Act of 2010, which was then extended by HR 3765 and extended again by HR 3630.

Starting 2013, the employee-portion of Social Security reverts back to the full 6.2%.

Reporting Payroll Taxes

Employers are required to report their payroll tax obligations and to deposit payroll taxes in a timely manner. Reporting requirements include:

  • Making federal tax deposits
  • Annual federal unemployment tax return (Form 940 or 940EZ)
  • Employer's quarterly payroll tax return (Form 941)
  • Annual Return of Withheld Federal Income Tax (Form 945)
  • Wage and Tax Statements (Form W-2)

Employers also have requirements to file reports with various state and local agencies. Employers can find links to state tax agencies through the American Payroll Association website.

Originally written by Diana Van Blaricom, a certified Professional in Human Resources (PHR). Edited and revised by Joshua Donatto.

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