If you are running a small business in the United States, then there are some necessary obligations that you will need to fulfill to duly comply with the rules prescribed by state and Federal law authorities. One of such rules is withholding payroll taxes in business. It is not optional, but it is essential to avoid fines and penalties that could come your way in case of non-compliance with this rule. As per the IRS published guidelines, your failure to pay taxes will eventually result in you paying the full amount due plus an ‘additional tax’, which could range between 2 to 15 % per month after the last date on a tax return has been passed.
There are 3 Categories of Payroll Taxes in the US. They include:
- Federal Income Tax
- Federal Insurance Contributions Act (FICA) Taxes
- State and Local Taxes
In most instances, your business will be required to pay all these 3 categories of payroll taxes and the calculation and payment of these taxes also differs in nature and complexity. That’s why: you will be better off hiring a Small Business Tax Preparation firm to handle this aspect of your business in the best possible manner.
1. Federal Income Tax:
FIT or Federal Income Tax is the first tax that comes to mind when holding back the payroll taxes is considered in the case of a company employee. The Federal Income Tax is deductible on all types of earnings that amount to the taxable income of employees. However, the total taxable income of employees does not include allowances provided by the company. These allowances are also referred to as exemptions from the tax, which would be best handled by experienced Tax Preparation Companies dealing in this field for quite some time now.
There are alternative methods to calculate the income tax liability of an employee. The most commonly used methods include the Percentage Method and the Wage Bracket Method.
Withholding Federal Income Tax is largely dependent upon 3 factors:
- The current Tax Bracket of the employees
- Total allowances claimed on the Form W-4
- Marital Status of the Employees
Paying the Federal Income Tax:
Paying of Federal Income Tax is carried out in the same way as for paying the Federal Insurance Contributions Act taxes by filing a Form 941 on a quarterly basis.
2. Federal Insurance Contributions Act Taxes:
FICA or Federal Insurance Contributions Act (FICA) Taxes are also referred to as Medicare and Social Security taxes. The onus of paying taxes on FICA taxes actually rests on both the employers as well as the employees. However, the responsibility of paying these taxes falls solely on employers only, and the best way you can do it is by having a Small Business Tax Services firm by your side to handle this aspect of your business.
For Medicare taxes, the minimum threshold limit for employees as well as employers stands at 1.45 % each with no upper limit to this contribution. For employees with an annual salary of $200,000 and above, there is provision for an additional tax of 0.9 percent depending upon the marital status of the employee. This additional tax is only required to be withheld from the employees in this case.
Social Security Tax:
For social security, the current tax rate is 6.2 % each both for the employees as well as the employers. There is also an upper wage base limit of $117,000, with the maximum tax amount to be paid is $7,254 for each employee.
How to Pay:
Payment of these withheld taxes on Medicare and social security services is actually done on a quarterly basis by filling Form 941, which is also called the Employer’s Quarterly Federal Tax Return.
3. State and Local Taxes:
Unlike the FIT and FICA taxes which are same throughout US, state and local taxes differ from state to state based on the taxes levied by the respective state authorities.
As per the local state legislation currently in place, there are 43 states in the US at present that make it obligatory for small business owners to pay state income taxes regularly. The seven remaining states where these no state taxes are enforced include Alaska, Florida, Texas, Nevada, South Dakota, Washington, and Wyoming.
Apart from Federal Incomes Taxes, FICA taxes and State taxes, some local authorities may also require small business owners to hold local income taxes as well. In most cases, these local taxes are mainly limited to a school district, a county, or a city.
How to Pay:
In order to duly pay the state and local taxes applicable in the place where your business is operating, you will first need to confirm the taxes that would need to be withheld from the state and local governments governing the region. You must also gather information on the amount of tax to be withheld if any, and whether there are any exceptions to the tax rule if any; and information about the procedure to pay such taxes to the appropriate authority.
When is the most appropriate time to deposit the withheld Taxes?
The most appropriate time for Income Tax Filing of Federal Income Tax and Federal Insurance Contributions Act Tax is primarily dependent on the deposit schedules are given by the IRS (Internal Revenue Service). For depositing, there are 2 schedules that can be followed, which include the monthly and the semi-monthly mode. For you, the deposit schedule would depend mainly on the total tax liability as disclosed on your completed Form 941.
For making payments, you can opt for the Electronic Federal Tax Payment System (EFTPS), but there are also some exceptions in place for using the EFTPS platform. That’s why; it will be better to first verify from the IRS Publication 15 about using the EFTPS platform in your case.
It will also be important to note that while depositing withheld taxes, you should make sure that you deposit unemployment taxes as well. These taxes are also of two types, including Federal Unemployment Tax and State Unemployment Tax. Although both of these taxes are governed by the regulation of the Federal Unemployment Tax Act (FUTA), you will have to deposit them separately to the appropriate authority. With the exception of 3 states including Alaska, New Jersey, and Pennsylvania; it is the sole responsibility of the employer to pay the federal and state unemployment taxes as well.