Payroll Taxes: The Basics You Need to Know

All employers must calculate their employees’ net pay by minusing payroll deductions from each employee’s gross pay. Sounds simple enough, right? Well, you have to know the details to make sure all is done with accuracy. Whether you’re a newbie or need a refresher, here are the basics for dealing with those pesky payroll taxes.

Payroll Tax Deductions – Required and Voluntary

As you know, there are particular withholdings employees must make by law and hand them over to various agencies. These are as follows: federal income tax (based on the tables in Publication 15), social security tax (starting at 6.2%), Medicare tax (1.45% – an additional 0.9% for those that make over $200,000), state income tax, and various local taxes, such as disability and unemployment. All of these taxes are mandatory. Now for the voluntary – these are to be withheld only if the employee agrees to them. These taxes include health insurance premiums, life insurance premiums, retirement plan contributions, employee stock purchase plans, and job-related expenses such as union dues. Depending on the time of benefit, voluntary taxes pay be paid with pre-tax or post-tax dollars.

Your Responsibilities

Employers have a lot of responsibility with handling the business’s money and payroll taxes are no exception – this responsibility is ongoing. A company must pay the employer’s payroll taxes, deposit the tax dollars withheld, prepare reconciliation reports, accounting for payroll expense through internal financial reporting, and filing payroll tax returns.

Understanding FICA

Notice that we listed the employer’s payroll taxes and the employee’s payroll taxes above. Under FICA (Federal Insurance Contributions Act), Social Security and Medicare are paid by both parties: 50% by the employer, and 50% by the employee. Together, this adds up to 15.3%. For Social Security, each party pays 6.2%, and for Medicare, each pays 1.45%. The additional Medicare tax for employees that earn $200,000 and over is an employee-only tax.


As stated above, after calculations are made, the most important responsibility of an employer is reporting and depositing the taxes withheld. These requirements (which must be done on time!) include making federal tax deposits, annual federal unemployment tax returns (Form 940 or 940EZ), employer’s quarterly payroll tax returns (Form 941), annual returns of withheld federal income tax (Form 945), and wage and tax statements (Form W-2). In addition, employers must file reports with state and local agencies, depending on the location, which can be found on the American Payroll Association website.

Feel like you got the 411? These are just the basics. Make sure you employ a detail-oriented accountant and the proper software to calculate everything accurately and punctually.

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