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The Fundamentals of Payroll Tax Withholding

When you have got staff, you’re answerable for paying them—however not earlier than taking out some cash for payroll taxes. The IRS, Social Safety Administration (SSA), and state and locality (if relevant) all require payroll tax withholding.

So, what’s payroll tax withholding? What do you might want to do to remain compliant?

What’s payroll tax withholding?

Payroll tax withholding is when an employer withholds a portion of an worker’s gross wages for taxes. Payroll withholding is obligatory when you have got staff. The quantity you withhold relies on the worker’s revenue. Remit the withheld payroll taxes to the suitable companies (e.g., IRS).

You’ll be able to both withhold taxes from worker wages manually or by utilizing payroll tax withholding software program. Withholding reduces the lump sum an worker could have to pay once they file their annual tax return. If the overall quantity you withhold for the 12 months is greater than what the worker owes, the worker receives a tax refund.

So, what all do you might want to withhold? You have to withhold the next for the worker portion of payroll taxes:

  • Federal revenue tax
  • Social Safety tax
  • Medicare tax
  • State revenue tax (if relevant)
  • Native revenue tax (if relevant)

Federal revenue tax withholding varies primarily based on the worker’s marital standing, dependents, and Kind W-4 changes.

Social Safety and Medicare taxes are often called FICA tax. In contrast to federal revenue tax, FICA tax is a flat share of an worker’s wages. And, FICA is an worker and employer tax, which means you should contribute the identical quantity you withhold from the worker’s wages.

Payroll withholdings exemptions

In some circumstances, an worker could also be exempt from federal revenue tax withholding. How have you learnt if in case you have a tax-exempt worker?

Don’t withhold federal revenue tax from an worker’s wages in the event that they declare exemption on Kind W-4.

Withholding payroll taxes

Now that you’ve somewhat background on what payroll tax withholding is, you will have some questions on how one can do it.

Right here’s the lowdown in your obligations regarding payroll tax withholding:

  1. Calculate the tax
  2. Withhold the tax
  3. Report the withheld tax
  4. Remit the tax to companies
  5. Doc the whole lot

payroll tax withholding process with illustrations

1. Calculate the tax

Step one of payroll tax withholding is to calculate the tax.

Once more, Social Safety and Medicare taxes are normal percentages. Social Safety tax is 6.2% of an worker’s wages—till they attain the Social Safety wage base. Medicare tax is 1.45% of an worker’s wages. If the worker earns above the Medicare threshold, you should withhold an extra 0.9% of their wages for added Medicare tax.

Federal revenue tax relies on the worker’s Kind W-4. If relevant, state revenue tax relies on the worker’s state W-4 type. Native revenue taxes both use a flat fee or a progressive tax fee.

Manually calculating payroll taxes might be time consuming and depart room for errors, particularly if the worker’s wages and hours change. To assist calculate the tax, think about using payroll software program.

Looking for software program? Know what to search for. Obtain our free information, “9 Issues to Take into account When Selecting Your Payroll Software program,” for the news!

2. Withhold the tax

After calculating the payroll tax, you need to dangle onto withheld payroll taxes till the time involves deposit it with the IRS and your state and locality.

Relating to payroll tax withholding, you have got a couple of choices. You’ll be able to:

  • Deposit the payroll tax legal responsibility in your enterprise checking account
  • Deposit it in a separate payroll checking account
  • Use a payroll service to deal with the withheld payroll taxes

Nevertheless you select to deal with the withheld tax, put it in safekeeping. Don’t spend the cash. Keep in mind, the withheld tax is a legal responsibility that you should remit to the companies by the due dates.

3. Report the withheld tax

The subsequent a part of payroll tax withholding is to report your staff’ wages and the way a lot you withheld. Report the withheld tax to the IRS, SSA, your state and/or locality (if relevant), and staff.

Check out the next paperwork you report payroll tax withholding on:

  • Kind 941 or 944 (IRS)
  • Kind W-2 (worker, SSA, state, and locality)

Seek the advice of your state and locality to discover ways to report withheld payroll taxes all year long. Take note of your federal, state, and native reporting deadlines.

4. Remit the tax to companies

Along with reporting payroll tax withholding to the suitable companies, you should additionally deposit the tax.

Deposit withheld payroll taxes to the:

Take note of federal, state, and native deposit deadlines to keep away from penalties. Federal deadlines are primarily based on whether or not you’re a month-to-month or semiweekly depositor. Seek the advice of your state and locality for state- and local-specific deadlines.

5. Doc the whole lot

One of the essential elements of payroll withholdings is to doc the whole lot. Preserve employee-related information corresponding to:

  • Pay fee
  • Hours labored
  • Gross wages
  • Taxes withheld
  • Internet wages

Additionally, make copies of the next varieties to your information, and preserve them in a safe location:

  • W-4
  • W-2
  • 941 or 944
  • State-specific varieties
  • Native-specific varieties

Confused about how a lot to withhold from an worker’s paycheck? Patriot’s payroll will do all of the calculations for you. Put your calculators away and get free, U.S.-based payroll setup and assist, free staff’ comp integration, and a lot extra. Begin your free trial at this time!

This text has been up to date from its authentic publication date of July 29, 2015. 

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