The IRS, nearly every state tax agency, and even some cities require employers to withhold a certain amount from their employee’s paychecks to cover income tax, social security, and medicare obligations. These are payroll taxes, and it’s your responsibility, as a small business owner, to collect and send them in. The amount varies from state to state, and in some cases city to city, but there are three main steps to collection.
Everyone you hire fills out a W-4, which gives you some basic information like family size and other deductions. They then turn that into you, and you use that information, along with their wage and IRS Publication 15-A, to figure out how much to withhold. That covers the federal income tax. Figuring out FICA taxes (i.e. social security and medicaid) is a bit more straight forward. IRS Publication 15 goes into a bit more detail, but you effectively withhold whatever the employee rate is for the current year and send that in, along with your matching payment.
Only nine states can brag that they don’t have any income tax, so chances are good you live in one that does. If that is the case, be sure to contact your state tax agency to see what withholdings they expect. And remember, even if your state has no income tax, you are still likely responsible for contributing to the state’s unemployment insurance.
Send in payments
The federal government has made it very easy to send in payroll tax payments – once you register with the Electronic Federal Tax Payment System, you can send payments directly to the US Department of Treasury. Frequency depends on your payroll tax liability. If you withheld over $50,000 over the course of a look-back period lasting a year, you send them in semi-weekly. Less than that, and it’s monthly. Most small business owners will qualify for the monthly schedule. Just remember that EFTPS is a payment system, which means you need to know how much you have to send in – it won’t calculate that for you. Most states have a similar payment system in place, but check with your local tax agencies first.
Alternatively, if you send in less than $2,500 in a quarter, you can pay when you file the report covered in the next section.
Finally the IRS and most states require you report how much you’ve withheld and sent in on a quarterly basis. The IRS normally uses Form 941 for this, which is filed once a quarter. In other words, every three months. As we mentioned before, if your payroll tax withholdings is less than $2,500 over that three month period, you can just send in a payment with Form 941.
For the sake of simplicity, the states that do collect payroll taxes typically follow a quarterly reporting schedule, but be sure to check with your local tax agency just to be sure.
Failing to report or send-in payroll taxes could land you in hot water with federal and state tax agencies, so just be sure to stay on top of payments and reporting. Thankfully, most automated payroll services, like Paychex, help calculate what is owed and track your payments. But if you’re handling payroll on your own, remember the three steps – calculate, pay, and report.