How To Understand Payroll And Employer/Employee Taxes

By Dan Handle, 22 Jan 19:52

While it may be true that the only two sure things in life are death and taxes, death doesn't have to be the more enjoyable of the two!

True, as an employer, it is necessary that you follow the required state and federal tax laws. And some of those laws can be complicated. But the basic principle behind them is simple: there are taxes you as the employer pay, and those that the employee must pay. You just need to know the difference, and then follow the rules. So don't despair - following is a list of the taxes and a brief description of what each one is.

(Factoid: During WWII, Disney created "The New Spirit," a cartoon illustrating why Americans should pay income taxes. Of the 60 million people who saw the film, 37% said they were more willing to pay taxes afterward.)

Employee-Paid Taxes

Employers are usually required by law to withhold specific taxes from an employee's wages. State tax rates vary from state to state, so be sure to check with your State Department for the specifics. All taxes you withhold will need to be reported on your employees' tax withholding forms (for example, form W-4). Employee-paid taxes you will need to withhold include:

Federal Taxes. The Internal Revenue Service requires that an employer withhold a certain amount of federal income tax from an employee's paycheck based on information the employee provides on Form W-4, the Employee's Withholding Allowance Certificate. This form is usually filled out at the time of initial employment. If an employee makes changes to this form, it may affect the withholding amount.

Social Security and Medicare Taxes (FICA). FICA (Federal Insurance Contributions Act) is deducted from employee wages to help cover the federal cost of providing care for the aging, disabled, and survivors. The Medicare tax covers the cost of hospital insurance for those who cannot afford it.
State and Local Income Tax. Employers are required by local and state government to withhold taxes payable to the state.
Unemployment Insurance. Employers are required by the state to deduct a certain amount of an employee's wages to cover its unemployment compensation program. Typically employees are eligible to receive unemployment wages for up to 26 weeks after they've been laid off, provided they worked at least 6 months out of the prior year and meet the minimum earning requirements.
State Disability. Some states may require an employer to deduct wages to cover its disability compensation program. This money comes from Social Security retirement benefits, and the amount the employee receives is roughly equivalent to those that would be paid for Social Security retirement.

Employer-Paid Taxes
In addition to withholding employee taxes, an employer is also responsible for paying certain taxes themselves. These include:

Social Security and Medicare (FICA). Employers are responsible for a certain amount of tax liability regardless of what is withheld from employees. The difference between the amount collected from employees and the entire tax due is the responsibility of the employer.
Federal and State Unemployment Insurance. Employers must pay federal and state unemployment insurance to help cover compensation paid to individuals who lose their jobs. The Federal Unemployment Tax (FUTA) is only employer-paid in order to help cover administrative costs associated with state programs.

State Disability. Some states, although not all, require employers to contribute to state disability program.

In order to know just how much tax must be paid and/or withheld, it is necessary to keep current with tax laws. Because these laws vary by region, city, state, etc., consult your local library or government to find out the correct annual amounts.

Interactive tax and income planning advice available, as well as free tax filing option.

Tags: payroll taxes unemployment fica withholding