To be very precise, Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and/or to pay on behalf of your employees. You are required to withhold state and federal income taxes as well as social security and Medicare taxes from your employees' wages. You are also required to pay a matching amount of social security and Medicare taxes for your employees and to pay State and Federal unemployment tax.
To know how much federal income tax to withhold from employee's wages, you should have a form W-4 (Employee's withholding Allowance certificate), on file for each employee. All taxable states also require state withholding forms; you may need to know more about it. Encourage your employee's to file an updated form w-4 for 2008, especially if they owed taxes or received a large refund when filing their 2007 tax return.
Generally speaking, employers report payroll by calculating gross pay and 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. Before calculating payroll, as an employer you need to understand statutory payroll tax deductions and voluntary payroll deductions.
Statutory Payroll Tax Deduction's
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%)
- State income tax withholding
- Various local tax withholdings (such as city, county, or school district taxes, state disability or unemployment insurance).
Voluntary Payroll Deduction's
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 eye care)
- Life insurance premiums
- Retirement plan contributions (such as a 401k 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. Professional grade payroll software will help you keep track of all the tax-related payroll calculations.
The responsibility for payroll taxes continues even after paychecks have been issued to employees. The company is responsible for paying the employer's share of payroll taxes, for depositing tax dollars withheld from the employees' paychecks, preparing various reconciliation reports, accounting for the payroll expense through their financial reporting, and filing payroll tax returns.
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 (Form 8109)
- 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)
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