Do You Understand Your Payroll Tax Obligations?

Payroll Taxes can be intimidating and complicated. Small business owners are responsible for withholding, reporting, and paying payroll taxes. Whenever you pay your employees, there are certain taxes that you have to withhold from their paychecks. You also have to pay the employer’s share of payroll taxes. Add to this the responsibility of filing tax forms and making payroll tax deposits.

By hiring an outsourced payroll service, you won’t need to worry about submission guidelines, the accuracy of payment, or getting your payroll taxes paid on time. It will take care of it for you.

What Are Payroll Taxes?

Payroll taxes are any taxes that are withheld from or calculated as a percentage of an employee’s wages. This includes federal and state income tax withholding, social security and medicare taxes, federal and state unemployment taxes, and state and local payroll taxes. Most payroll tax revenue is used to administer government benefit programs.

What do Payroll Taxes Pay For?

The federal government levies payroll taxes on wages and uses most of the revenue to fund Social Security, Medicare, and other social insurance benefits. Federal income taxes also go towards things like defense and security. State income taxes go towards a variety of areas, the most important being education and health care, as well as transportation, corrections, state police, parks, and recreation.

Which states Don’t Have Income Tax?

There are currently nine states in the U.S. that do not levy an income tax on wages:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

New Hampshire and Tennessee don’t tax wages, but they do tax some dividends and interest income

Employer Payroll Tax Responsibilities

Employer responsibilities for payroll taxes include the following:

  • Report and pay the employer share of payroll taxes to proper federal, state, and local authorities
  • Calculate the employee share of payroll taxes and withhold these amounts from employees’ paychecks during every payroll in your payroll schedule
  • File payroll tax returns in accordance with tax deadlines
  • Provide tax documentation to employees and independent contractors, such as the W-2 Form and 1099-MISC Form
  • Account for payroll expenses when you balance your books

Types of Payroll Taxes

Employer payroll taxes are usually made up of these four taxes:

  • Federal Unemployment Tax: This tax covers the costs of administering Unemployment Insurance and Job Service programs in all states.
  • State Unemployment Tax: This tax, paid to state workforce agencies, is typically used to pay unemployment benefits to state workers. State law determines individual state unemployment insurance tax rates.
  • Social Security: Per dollar, 85 cents goes to a trust fund that pays monthly benefits to current retirees and their families and to surviving spouses and children of workers who have died. The other 15 cents goes to a trust fund that pays benefits to people with disabilities and their family.
  • Medicare: This tax goes to a trust fund that pays for some of the costs of hospital and related care of all Medicare beneficiaries.

Payroll Tax Penalties

Payroll taxes are due to the government. When the taxes are not paid, are paid late, or are paid, but don’t follow the correct guidelines, employers can face severe penalties and accrue interest.

The three components that make up a correct deposit are: (1) the deposit is made timely, (2) the deposit is in the correct amount, and (3) the deposit is made in the correct manner. A failure to comply with any of these components will subject the deposit to the FTD (Failure to Deposit) penalty. The percentage rate charged depends on the number of calendar days a deposit is late or whether there is a direct payment. Outsourced payroll services can ensure your payroll taxes are paid correctly and on-time. 

Hire Outsourced Payroll Services in Denver to Handle Your Payroll Taxes

By outsourcing payroll, businesses are ensured their processing duties are handled by experienced tax professionals. These people are required to stay on top of all updates and changes to current tax laws. Compliance issues will always be a big reason to outsource as the IRS has many rules and regulations around tax payments, tax filing and record keeping. They issue penalties with interest if employers fall out of compliance.

The Bottom Line

With the sheer number of taxes, rules, and deadlines, payroll taxes can seem very intimidating. Using payroll software or an outsourced payroll service provider definitely helps by automating calculations, withholdings, deposits, and reporting. However, it’s still a good idea to understand why you’re paying taxes and what your hard-earned money is being used to fund.

Limitless Investment and Capital Outsourced Payroll Services

Small business owners spend an average of eight hours a month performing payroll functions. That’s 12 full days a year that could be spent generating sales, prospecting new business opportunities, improving products or services, or servicing customers. We help you stay compliant while significantly reducing in-house staffing needs and costs. Outsource your payroll TODAY!