Your legal requirements as an employer.
Because the US tax laws are so confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
However, here is a quick primer to walk you through the broad contours.
It starts with determining the salary paid to the employee during the period covered by the paycheck. From this total pay which is known as gross pay, the employer is required by law to withhold certain percentages of an employee’s paycheck to pay required tax withholdings. After voluntary payroll deductions are subtracted and legally required payroll deductions are subtracted, the pay that the employee receives is called their net pay.
Using appropriate forms the employer must report & pay withholdings to government agencies including their share. Additionally, as per tax experts, the employer is responsible for “preparing various reconciliation reports, accounting for the payroll expense through their financial reporting, and filing payroll tax returns.” (Do you know the mandatory & voluntary payroll deductions that impact you?)
Payroll Tax Deductions
The payroll taxes that must be collected and paid by the employer include:
- Federal, state & local income tax
These are subtracted from the employee’s gross pay by the employer & Social security taxes, determined by using the number of deductions declared by the employee on the W-4 form in conjunction with the tax charts provided by the Internal Revenue Service (IRS).
- Social Security & Medicare tax withholding
Social Security and Medicare tax withholding are subtracted from an employee’s gross pay by the employer. Known as FICA (Federal Insurance Contributions Act) taxes, they are paid by both the employee and his or her employer. Currently, the following tax percentages that add up to 15.3% are paid:
- Social Security: both the employer and the employee pay 6.20 percent of the employee’s gross pay ( i.e. 12.4%) on earnings up to the applicable taxable maximum amount ($132,900 in 2019). Note that individuals who are self-employed are responsible for paying the full amount. The Social Security withholding rate is set using a formula based on inflation.
- Note: The term “Social Security tax” or “OASDI” is often confused with “FICA taxes,” which include both Social Security and Medicare taxes.
- Medicare: both the employer and the employee pay 1.45 percent on all earnings (i.e. 2.9% total) with no maximum. (If an individual is self-employed, he or she pays the whole amount.)
There is an additional Medicare tax imposed on higher-income individuals. This tax is 0.09 percent, withheld on income above $200,000 each year. The tax is payable based on the individual’s income level and federal tax filing status. And guess what – no wage limit for Medicare tax; all covered wages and salaries are subject to Medicare tax.