How Much Tax Should Employers Be Paying and Withholding? | Two Roads

How Much Tax Should Employers Be Paying and Withholding?

It's that age-old question for employers: how much tax should I be paying and withholding?

How Much Tax Should Employers Be Paying and Withholding?

Figuring this out on your own can be tricky, which is why the help of professional bookkeepers or an enrolled agent is invaluable. But in the meantime, let's cover some basics to help you get more information on this topic.

First, let's talk more about payroll taxes, to begin with.

Payroll taxes (withholdings)

Every time payroll is run, certain payroll taxes are taken from your employees' paychecks.

Here are some things you should know about that:

  • Payroll withholdings include federal, state and sometimes even local taxes
  • Tax withholding involves deducting payroll taxes based on a percentage of the employee’s income for federal, state, and local income taxes
  • Payroll taxes include employer taxes, and the employer is the only one responsible for paying them
  • There are, however, some payroll taxes the employee and employer split, including Medicare and social security

It's also important to note that these apply to employees, specifically. If you own a business that employs contractors rather than having employees, your contractors are responsible for their own payroll taxes.

Tax Withholding: Federal, State, and Local

Now, let's move on to more specifics about tax withholding, as broken down under federal, state, and local categories.

Withholding federal taxes

  • Federal Income Tax: The employer is responsible for withholding these taxes
  • (FICA) Federal Insurance Contribution Act taxes: These are split between the employer and employee
  • (FUTA) Federal Unemployment Tax: These are 100% employer-paid

Additionally, the IRS explains:

"To figure out how much tax to withhold, use the employee's Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods.

You must deposit your withholdings. The requirements for depositing, as explained in Publication 15, vary based on your business and the amount you withhold."

Withholding state taxes

  • State Income Tax: It is the employer's responsibility to withhold State Income Tax on each paycheck if your state has an income tax (More on that in a moment)
  • State Unemployment Tax (SUTA): These are employer-paid, except in Pennsylvania, New Jersey, and Alaska, where they are split between employer and employee

All states but seven have a state income tax. These are Florida, Nevada, Alaska, South Dakota, Texas, Washington, and Wyoming. Additionally, Tennessee and New Hampshire do not tax wages. Rather, they tax dividends and interest income.

Withholding local taxes

Depending on where your business is, local taxes can vary. Generally, they include things like transit, municipality, school board, and several other taxes. The rules for paying or withholding local tax vary by state and by law which is why you'll want to work with a professional for your business taxes.

(Learn more about how we can help with payroll and other business tax services here)

How to Collect and Report Payroll Taxes

Now you know more about tax withholding. But what about paying the tax you collect from employees? The way you do this will depend on the kind of taxes you collect.

For starters, you will remit federal-level taxes to the Internal Revenue Service (IRS). As for state taxes, these can go to various tax authorities depending on the particular tax. These include the department of revenue for income taxes and the department of labor for unemployment taxes.

You will also pay local taxes to the relevant tax authorities.

(The right accounting software makes IRS documentation much easier. Click here to learn about the options available for your business)

Filing Regular Payroll Reports

Your next question might be about how often you have to report the payroll tax amounts you collect.

Here are some helpful guidelines to follow:

  • Federal level taxes (including income tax, Medicare, social security, and tipped wages)
  • Quarterly, report federal level taxes, including income tax, Medicare, social security and tipped wages using Form 941 — Employer's Quarterly Federal Tax Return
  • Report Federal Unemployment Taxes (FUTA) annually using Form 940
  • For state-level taxes, there is no universal form to use, but you will report them quarterly using wage detail reports
  • As for local taxes, reporting is determined by the local tax agencies
  • As an employer, you must provide your employees with W-2s and relevant tax agencies by January 31 (year-end)

(We know IRS documentation can be tricky to navigate. Take a look at this post next to learn about what's required of small business owners for tax documentation)

Trust Two Roads to Help

All of this information might feel overwhelming. But here's the thing: filing your taxes shouldn’t feel overwhelming! We help you navigate the process easily and take surprises out of the game for federal, state, and local filings.

Click here to book a call, and let's talk about the best way for us to work together.

Did you learn a lot about tax withholding and payroll in this post? Here are three more posts you should read next: