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The Fundamentals of Payroll Tax Withholding


When you’ve workers, you’re liable 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’ll 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 necessary when you’ve workers. The quantity you withhold relies on the worker’s earnings. Remit the withheld payroll taxes to the suitable companies (e.g., IRS).

You possibly can both withhold taxes from worker wages manually or through the use of payroll tax withholding software program. Withholding reduces the lump sum an worker could must pay after they file their annual tax return. If the overall quantity you withhold for the yr is greater than what the worker owes, the worker receives a tax refund.

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

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

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

Social Safety and Medicare taxes are generally known as FICA tax. Not like federal earnings tax, FICA tax is a flat proportion of an worker’s wages. And, FICA is an worker and employer tax, which means it’s essential to contribute the identical quantity you withhold from the worker’s wages.

Payroll withholdings exemptions

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

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

Withholding payroll taxes

Now that you’ve got somewhat background on what payroll tax withholding is, you’ll have some questions on methods to 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 all the pieces

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 customary 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, it’s essential to withhold a further 0.9% of their wages for added Medicare tax.

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

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

Searching for software program? Know what to search for. Obtain our free information, “9 Issues to Think about When Selecting Your Payroll Software program,” for the inside track!

2. Withhold the tax

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

With regards to payroll tax withholding, you’ve a number of choices. You possibly can:

  • Deposit the payroll tax legal responsibility in your online business 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. Bear in mind, the withheld tax is a legal responsibility that it’s essential to 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 workers’ wages and the way a lot you withheld. Report the withheld tax to the IRS, SSA, your state and/or locality (if relevant), and workers.

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, it’s essential to 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 based mostly 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 all the pieces

One of the vital vital elements of payroll withholdings is to doc all the pieces. Maintain employee-related data comparable to:

  • Pay price
  • Hours labored
  • Gross wages
  • Taxes withheld
  • Web wages

Additionally, make copies of the next types on your data, and preserve them in a safe location:

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

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 employees’ comp integration, and a lot extra. Begin your free trial at the moment!

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



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