Payroll is an important part of any business that employs workers. Paying your employees the right amount at the right time is essential to maintaining goodwill with your employees, not to mention staying in compliance with employment laws.
While payroll is a basic function of an employer’s daily operation, it can also be difficult to get your arms around. So we’ve identified some of the most frequently asked questions about payroll and provided answers and resources to point you in the right direction.
Which payroll taxes are the employee’s responsibility?
According to the Federal Insurance Contributions Act (FICA), the employee is responsible for a 6.2% Social Security tax on income up to $127,200 for 2017, and a 1.45% Medicare tax. Unlike the Social Security tax, there is no wage limit applied to the Medicare tax. Additionally, employees filing single status who make more than $200,000 annually are also responsible for a 0.9% Medicare surtax applied to the wages over the $200,000 threshold. There are varying thresholds for other filing statuses.
Additionally, federal income taxes are withheld from an employee’s wages, as are any state or local income taxes in areas where those apply.
Which payroll taxes are the employer’s responsibility?
FICA requires the employer to match the employee’s portion of the Social Security tax (6.2% of the employee’s salary up to $127,200) and Medicare tax (1.45% of the employee’s salary). The employer does not pay the 0.9% Medicare surtax.
The employer is also responsible for state (SUTA) and federal (FUTA) unemployment tax. FUTA is 6% on each employee’s first $7,000 of income. The amount paid to the federal government is the total amount owed minus the amount paid to the state, which counts as a federal tax credit (up to a maximum of 5.4%). SUTA rates vary by state and are administered by your state’s revenue department.
Which payroll deductions are taken pretax?
Below are some of the benefits deducted from an employee’s wages prior to calculating taxes:
- Insurance payments: health, dental and vision
- Voluntary benefits including long-term disability (LTD), short-term disability (STD) and accident, depending on the plan document can be pretax or posttax.
- Section 125 flexible spending arrangements (FSAs) for medical expenses, dependent care, and adoption assistance (adoption assistance only exempt from federal and state income tax).
- Section 132 transportation plans for commuter and parking expenses
- 401(k), 403(b) retirement contributions (federal and state income tax only)
- Life insurance over $50,000 is exempt from federal and state income tax, but not Social Security and Medicare taxes (FICA) or federal unemployment tax (FUTA) for the employer.
Amounts that can be contributed annually to Section 125, Section 132 and 401(k) plans are regulated by the federal government.
When are payroll taxes due?
That depends on whether you’re talking about reporting them or paying them, as well as how much you previously paid in employment taxes.
Here’s an overview of payroll tax reporting deadlines from the IRS:
By January 31
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. You have ten extra days if you deposited all of the federal unemployment tax when due.
- Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
- Form 944, Employer’s Annual Federal Tax Return, only if the IRS notified you it was needed in writing.
- Form 945, Annual Return of Withheld Federal Income Tax. This form reports nonpayroll income tax withheld in the previous year. You have ten extra calendar days if you deposited all taxes when due.
- Copy A of Forms W-2, Wage and Tax Statement, with Form W-3, Transmittal of Wage and Tax Statements (paper or electronic).
- Copy A Form 1099, Miscellaneous Income, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns (paper or electronic, only if there is income listed in box 7).
By February 28
- Copy A of Form 1099, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns (paper only, other than those with entries in box 7).
- Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (paper only).
By March 31
- Form 1099 (electronic only, other than those with entries in box 7).
- Form 8027 (electronic only).
By April 30, July 31, October 31, and January 31 (for the fourth quarter of the previous calendar year)
- Form 941, Employer’s QUARTERLY Federal Tax Return. You have ten extra days to file the return if you deposited all taxes when due.
Your deposit schedule will either be monthly or semiweekly, depending on how much you paid in taxes during a lookback period. For those filing Form 941, the 2017 lookback period is July 1, 2015, through June 30, 2016. For those filing Form 944, the 2017 lookback period is calendar year 2015.
If you paid $50,000 or less in taxes during the lookback period, you will deposit monthly. You should make monthly deposits by the 15th of the following month.
If you paid more than $50,000, you will deposit on a semiweekly basis. That means you will deposit employment taxes on Wednesdays (for paydays on the previous Wed., Thur., or Fri.) and Fridays (for paydays on the previous Sat., Sun. Mon., or Tue.).
For FUTA, you should make a quarterly deposit by the last day of the month following the end of the quarter. If the last day falls on a weekend, you have until the next business day.
You can find more detailed information about the schedule in IRS Publication 15 (Circular E), Employer’s Tax Guide.
How often do I have to pay employees?
This varies from state to state, and sometimes even within the same state depending on the industry. The highest payment frequency required is weekly, and the lowest is monthly. Additionally, three states (Alabama, Florida and South Carolina) don’t have requirements related to pay frequency. You can find a full chart of payday requirements by state on the FindLaw site.
What should I do if an employee never cashes their paycheck?
You should make a good-faith effort to reach the employee, first by phone, then by certified mail at their last known address, documenting each attempt to contact them. Each state and the District of Columbia has its own defined “abandonment period” for property, and once that time has passed, you should report and turn over the unclaimed property to the state according to the state’s escheatment process.
What payroll records need to be kept and for how long?
Fair Labor Standards Act
Per the Fair Labor Standards Act (FLSA), you should keep payroll records for at least three years, and records pertaining to how wages were computed (this includes things like time cards, wage rate tables, schedules and records of additions or deductions from wages) for two years.
The IRS says you should keep records of employment taxes for four years after the fourth quarter of taxes is filed. For more information on the types of payroll tax data you should hang on to, see the IRS employment tax recordkeeping page.
Can I pay an employee without a Social Security number?
Generally, no. The employee’s name and Social Security number are required for Form W-2, and you may incur a penalty if you fail to provide the correct information. If an employee doesn’t have a Social Security card at the time of hire, you should instruct them to apply for one via Form SS-5.
If the employee has not received the Social Security card by the time you have to file the W-2, the IRS advises to enter “Applied For” in the appropriate section of the paper form or enter all zeroes if filing electronically. You will then need to file Form W-2c, Corrected Wage and Tax Statement, with the Social Security Administration once the employee’s Social Security number is available.
Are payroll taxes deductible for my business?
Yes, payroll taxes paid by the employer are deductible for the employer. For business owners who pay these as self-employment taxes, they are deductible on their personal income tax return.