Employers’ Guide to Payroll Tax

When people think of starting a business, they typically look forward to creating and selling a useful product, providing a needed service, interacting with customers or clients, and creating jobs in their community. No one daydreams about sitting at their desk, calculating payroll taxes.

But payroll tax is a critical aspect of running a business, and it’s important to get your calculations and withholding right. Failure to do so can result in penalties and fines from the IRS and state tax authorities, interest charges on unpaid or underpaid tax, audits and investigations, and even legal actions against an employer who consistently fails to file payroll taxes.

In this blog post, we’ll discuss the fundamentals of payroll taxes for employers, and how to make sure you, as a business owner, meet your state and federal payroll tax obligations.

What is Payroll Tax?

Federal payroll tax generally refers to includes Social Security and Medicare taxes. These are known collectively as FICA taxes, after the Federal Insurance Contributions Act that mandates payroll contributions to fund those programs. Also included is federal unemployment tax, or FUTA tax, so called because of the Federal Unemployment Tax Act of 1939. State payroll tax includes state unemployment insurance tax, and other taxes which vary from state to state.

As a tax on salary, wages, and tips, income tax can be considered a kind of payroll tax. Ohio employers withhold a portion of employees’ income for income tax, including school district income tax that apply to employees who work within certain school districts, whether or not they live in those districts. Other local taxes may also be withheld. However, the term “payroll taxes” generally refers to taxes withheld for Social Security, Medicare, and unemployment insurance.

What is the 2023 Payroll Tax Rate?

Some payroll taxes are paid equally by the employer and employee; others, such as taxes for unemployment insurance, are borne solely by the employer. The overall federal payroll tax rate for 2023 is 15.3%, with the employer and employee each being responsible for 7.65%. The breakdown of federal payroll tax rates for tax year 2023 is as follows:

  • Social Security: employer: 6.2%; employee: 6.2%
  • Medicare: employer: 1.45%; employee: 1.45%
  • Additional Medicare: 0.9% for employees with wages in excess of $200,000 per year
  • FUTA: 6% paid by employer on first $7,000 paid to the employee

What are Employers’ Payroll Tax Obligations?

As an employer, you are responsible for accurately calculating and withholding the appropriate payroll taxes from employees’ paychecks, as well as calculating and remitting your own share of contributions. You must also, of course, timely provide tax-related documents to your employees, including annual W-2 (Wage and Tax Statement) forms.

Employers must file tax returns and reports, including IRS Form 941, which reports federal income tax withholding along with withholding for Social Security and Medicare. This form must be filed on a quarterly basis. Another required payroll tax filing is IRS Form 940, which reports payments for federal unemployment tax and must be filed annually. Also, just as you must provide your employees with their annual W-2 forms, you must also submit copies of those forms to the Social Security Administration along with Form W-3 (Transmittal of Wage and Tax Statements).

In addition, you must maintain thorough records of payroll activity, including employee wages paid, taxes withheld, and tax payments remitted. Consult with a tax professional to determine how long these records must be kept. Generally, employers are required to keep payroll records for at least four years following the date an employee’s income tax return is due. For example, employees must file their personal tax returns for tax year 2023 by April 15, 2024. As an employer, you should plan to keep payroll records relating to that income until at least April 15, 2028.

Help with Payroll Taxes for Employers

Depending on your expertise, in-house support, and the size of your organization, fulfilling your payroll tax obligations can feel burdensome and even detract from your ability to focus on the work of your business. As an employer, you know that it makes sense to assign tasks to employees who can perform the work better and more efficiently. The same principle holds true for taxes. Working with an experienced payroll tax professional frees up your valuable time and offers you the assurance that your payroll taxes are being handled properly.

The Bottom Line

If payroll taxes are a task you would prefer to avoid, outsourcing them is easier and more cost-effective than you might imagine. The first step is to schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.