Payroll Taxes – What You Need to Know
As you’ve probably know so far you’ll need to spend money to make money and nowhere is this more noticeable than in hiring employees, since they soon become your most important expense (and your most important source of income).
Even when a business owner is delegating the tax related work to an accountant, they still need to know about the payroll tax and how it works. This is where most of your accounting work will go and where you’ll owe the government the most.
What is it for?
The federal government pays for a variety of different social programs. These are funded by taxing those who have a steady income at the source, meaning by taxing the employers on their income before the salary is paid to the worker. This is what payroll taxes are.
The biggest part of it is paying for Social Security and Medicare, but it also covers other insurances such as the ones that cover being injured on the job and unemployment benefits. Income tax is paid on salaries as well at least in some states and it pays for more broad selection of items covered by the budget.
Paying Online
The process for paying these taxes is very much streamlined and simplified. That’s because even the smallest of businesses, that pay salaries to their employees need to pay this tax. For the most part it can be done online since that’s the simplest way to do it.
The Electronic Federal Tax Payment System is the online system on which you can complete this process from the start to finish. This includes applying for the tax itself once the business is set up and up to the making the actual payments.
What taxes you need to pay?
As you may know the tax code is rather complicated and there are many specific details that you should get into with your accountant, but broadly speaking there are a few taxes for you to take into account right away since they are the most common.
These include the following: federal income tax, Social Security tax, Medicare tax, and a state income tax. It’s important to note that the rates and allowances for this isn’t the same for every state and there are states that don’t have any income tax to talk about.
The rates
For 2019, the Social Security tax rate is 6.2% on the first $132,900 of wages paid, up $4,500 from 2018. The Medicare tax rate is 1.45% on the first $200,000 of wages (plus an additional 0.9% for wages above $200,000).
It’s also important to note that there are states that don’t have any state tax to pay. These are: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. There’s also no tax on wages in New Hampshire and Tennessee, but other means of earning an income are taxed in these states. It includes: dividends and interest based income.
How to calculate the tax?
The tax is based on how much the employee earns so if you know that amount and you know the rates for each individual tax you’ll know how to pay. This also depends on which state you’re in so you can add the income tax if there’s one in your state.
Social security takes up 6.2 percent of the income you make and there’s a cap at 132.900 $ a year. Medicare is set at 1.45 of your salary and there’s no cap on it. The amount you need to pay rises by 0.9 percent if you earn more than 200.000 $ a year.
Federal and state income tax are a bit more difficult to calculate because they are paid by the employee but taxed at the source. There are many benefits, allowances, and tax breaks for employees, based on their other income if they have any and based on their age, and marital status.
Penalties
There are penalties for not paying your taxes on time and not paying the correct amount for your taxes. There are 3 main issues that might arise: you may not be on time, you may not pay the right amount, you make a technical mistake as to how you’re paying the tax.
The penalties are as follows:
-2 percent for deposits 1–5 days late
-5 percent for deposits 6–15 days late
-10 percent for deposits made more than 15 days late. This also applies to amounts paid within 10 days of the date of the first notice requesting payment for the tax due.
-10 percent for required deposits not paid by EFT (Electronic Funds Transfer)
-15 percent (a 5 percent addition to the 10 percent for late payment) for all amounts still unpaid more than 10 days after the date of the first notice requesting payment of the tax due, or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier.
