You are responsible for paying them when you have employees—but only after deducting payroll taxes. The IRS requires payroll tax withholding, the Social Security Administration (SSA), and the state and municipal governments (where applicable).
Payroll tax deductions are required. By law, employers must withhold employment taxes from their employees, and Federal income tax withholding and Social Security and Medicare taxes are included in employment taxes.
Use And Significance Of Payroll Withholding System
Employees and employers can use the withholding system to withhold money for federal and state taxes, pension schemes, insurance, etc. The withholding is paid directly to the beneficiary by the employer, and federal taxes, for example, are paid directly to the IRS.
FICA taxes are the Social Security and Medicare levies. Withholding of state income taxes. Withholdings for local taxes, such as city or county taxes, and state disability or unemployment insurance. The court-ordered child support.
What is payroll tax withholding, exactly? What must you do to remain compliant?
Let’s see about them.
What is Payroll withholding?
When an employer withholds a portion of an employee’s gross wages for taxes, this is known as payroll tax withholding. When you have employees, payroll withholding is required. The employee’s earnings determine the amount withheld. Pay the appropriate agencies the withheld payroll taxes (e.g., IRS).
You can manually withhold taxes from employee wages or use payroll tax withholding software. Withholding lowers the amount an employee may owe when filing their annual tax return. If the total amount withheld for the year exceeds the amount owed by the employee, the employee will receive a tax refund.
So, what exactly must you withhold? For the employee component of payroll taxes, you must withhold the following:
- Income taxation at the federal level
- Social Security contributions
- Healthcare tax
- Taxes levied by states (if applicable)
- Income tax levied locally (if applicable)
The federal income tax withheld depends on the employee’s marital status, dependents, and Form W-4 changes.
Payroll Tax Withholding
Now that you know what payroll tax withholding is, you may have some questions about how to go about doing it.
Here’s what you need to know about your payroll tax withholding responsibilities:
- Determine the tax.
- Retain the tax
- Report the tax withheld.
- Remit the tax to the appropriate agencies.
- Record everything.
1. Determine The Tax
Calculating the tax is the first step in payroll tax withholding.
Again, the percentages for Social Security and Medicare taxes are usual. Employees pay 6.2 percent of their wages in Social Security taxes until they reach the Social Security wage base. The Medicare tax is 1.45% of an employee’s pay. You must withhold an additional 0.9 percent of the employee’s wages for additional Medicare tax if they earn more than the Medicare threshold.
The employee’s Form W-4 is used to calculate federal income tax, and state income tax is calculated using the employee’s state W-4 form if appropriate. A flat or progressive tax rate is used in local income taxes.
Calculating payroll taxes manually can be time-consuming and error-prone, significantly if an employee’s income and hours fluctuate. Consider employing payroll software to assist with tax calculations.
2. Retain The Tax
After calculating the payroll tax, save the withheld payroll taxes until it’s time to deposit them with the IRS, your state, and your area.
You have a few alternatives when it comes to payroll tax withholding. You can:
- In your business bank account, deposit the payroll tax liability, and deposit it into a separate payroll bank account.
- To handle withheld payroll taxes, use a payroll service.
Put the withheld tax in a safe place, no matter how you handle it. Don’t waste your money. Remember that the withheld tax is a responsibility that must be remitted to the appropriate agencies by the deadlines.
3. Report The Tax Withheld
Reporting your employees’ salary and the amount you withheld is the next step in payroll tax withholding. The IRS, SSA, your state and locality (where applicable), and your employees should all be notified of the withheld tax.
Examine the following documents to which you must report payroll tax withholding:
- Form 941 or 944 (IRS)
- Form W-2 (employee, SSA, state, and locality)
To discover how to report withheld payroll taxes throughout the year, check with your state and locality. Pay attention to the deadlines for federal, state, and local reporting.
4. Pay The Tax to The Appropriate Agencies.
You must deposit payroll tax withholding and report it to the appropriate entities.
Deposit withheld payroll taxes to:
IRS \sState \sLocality
To avoid penalties, keep track of federal, state, and local deposit deadlines. The federal deadlines are determined by whether you deposit monthly or semiweekly. For state and local deadlines, check with your state and municipality.
5. Keep Record of Everything
Documentation is one of the most crucial aspects of payroll withholdings. Keep records about your employees, such as:
- Pay rate
- Working hours
- Gross earnings
- Withheld taxes
- Wages net
Additionally, make copies of the necessary forms for your records and save them safely:
Are you unsure how much to deduct from an employee’s pay? Accounting Mississauga will do all of the math for you. Put your calculators away and take advantage of free payroll setup and support in Canada and free workers’ compensation integration.