If you have employees, you need to navigate the sometimes difficult and confusing maze of payroll taxes. You’ll have to withhold taxes from your employees’ pay, send the withholding off to the proper federal and state tax agencies, and pay certain other taxes based on how much you pay your workers. You may also owe some payroll-type taxes on income you earn from your business. Here are a few of the basic considerations:
- Who’s a taxable employee? There are laws that define whether a worker is subject to payroll taxes. Generally, a worker is considered an employee, and subject to payroll taxes, if you direct and control the way they do their work and not just the results of the work. Otherwise, the worker may be characterized as an independent contractor, and thus not subject to payroll taxes. Even part-time workers can be classified as employees for payroll tax purposes. If you misclassify a worker as a contractor and fail to withhold taxes, the IRS could impose penalties.
Which taxes apply? Your payroll tax obligations will consist of some combination of the following:
- Federal income tax withholding. Each employee must fill out a W-4 form to list their marital status, withholding exemptions, and other factors that affect withholding. You calculate the amount to withhold using the IRS tax tables found in this Employer’s Tax Guide PDF. The idea is to come close to each employee’s year-end tax liability.
- FICA taxes. A portion of the taxes you withhold from your employees’ wages are Federal Insurance Contributions Act (FICA) taxes, covering Social Security and Medicare contributions. You as the employer, and your employees, each pay an equal share of these FICA taxes.
- Unemployment taxes (FUTA). You are responsible for helping to fund the unemployment tax system by paying a payroll tax based on several factors, including the amounts you pay employees, the type and age of your business, and the unemployment claims filed against your business.
- State and local payroll taxes. If your business is in a state with a personal income tax (all but nine states fall into this category), you probably have state (and sometimes local) tax withholding and reporting obligations. Most states allow you to use reporting methods similar to those used for federal purposes.
- How are deposits made? All federal tax deposits must be made electronically using the Treasury Department’s free Electronic Federal Tax Payment System (EFTPS).