The costs of employing workers go beyond wages and benefits. Employers are also responsible for paying a share of payroll taxes based on each employee’s wage, salary, and tips or bonuses.
Payroll taxes are taxes paid by both the employer and the employee, but it’s the employer’s responsibility to withhold the applicable payroll taxes from each employee’s wages and remit them to the applicable federal and state tax agencies. That’s in addition to paying their own share of the taxes. Together, these taxes are used to pay for social insurance programs, like Medicare and Social Security.
Understanding payroll taxes and your responsibilities as an employer is essential to ensure you avoid significant penalties.
Payroll tax breakdown
The employer payroll tax is the portion of the total payroll taxes for each employee that the employer must pay. The exact amount an employer will owe in payroll taxes depends on the number of employees they have and how much they pay them. Payroll taxes are calculated as a percentage of every employee’s gross taxable wages.
Employers are responsible for several specific payroll taxes:
- Social Security Tax: As part of the Federal Insurance Contributions Act (FICA), employers must pay 6.2% of each employee’s wages to cover Social Security taxes. The employees pay an equal amount which the employer withholds from their paycheck and remits to the government.
- Medicare Tax: Medicare tax is another payroll tax under FICA that employers and employees split equally. Currently, employers are responsible for paying 1.45% of each employee’s wages in Medicare tax. As with the Social Security tax, the employer withholds an equal amount from each employee’s paycheck to cover the employee’s portion of this tax.
- Federal Unemployment Tax: Unlike Social Security or Medicare taxes, the federal unemployment tax is the sole responsibility of the employer. Under the Federal Unemployment Tax Act (FUTA), employers must pay 6% of the first $7,000 in each employee’s wages. It’s worth noting, though, that many businesses receive a tax credit of 5.4% on federal unemployment tax, meaning they only pay 0.6% to FUTA.
- State Unemployment Tax: State unemployment taxes are additional payroll taxes that are the sole responsibilities of the employer, except in Pennsylvania, New Jersey, and Alaska. Employers with employees in these states must withhold state unemployment taxes from their wages and remit them to the state tax agency. The state unemployment taxes are different by state, so be sure to check with each state where you employ workers to determine the applicable State Unemployment Tax Act (SUTA) tax rates.
Employers who employ international workers will likely be responsible for additional payroll taxes in each country where those international employees reside. That’s part of what makes managing payroll compliance for distributed teams more difficult.
Utilizing a yearly payroll breakdown form
It’s fair to say that understanding and controlling payroll can be a complicated, time-consuming task for employers. A payroll breakdown form is one tool that can make the process simpler.
Payroll breakdown forms organize all the relevant payroll information into an easy-to-read report. These forms can contain information like gross and net wages, tax withholdings, and other deductions for employees. Typically, employers can also view this information at the departmental level or for the whole workforce. More granular forms may show how much paid time off (PTO) each employee has taken and how much the employees and employer have contributed to retirement plans.
You can use this information to calculate the FICA taxes and unemployment taxes your company must pay in payroll taxes each quarter. Having all the relevant information nicely summarized in one form makes managing your payroll tax burden much easier.
Free yearly payroll breakdown forms are available online from several sources. You simply enter the relevant information as needed and these forms help ensure that the payroll data you provide to federal and state tax agencies is accurate.
The payroll reports employers must file regarding payroll taxes include:
- Form 941, Employer Quarterly Federal Tax Return: This form is the way most businesses report their federal payroll taxes to the IRS. It covers information like Medicare and Social Security tax deductions from employee wages, wages paid to employees, and federal income tax withheld from wages.
- Form 940, Employer Annual Federal Unemployment Tax: Form 940 is the form businesses use to report and pay their FUTA taxes.
- State and Local Payroll Forms: When businesses need to pay state and local payroll taxes, they must use additional state and local payroll forms and typically pay quarterly.
Once again, businesses operating in more than one country must be aware of their multi-country payroll obligations. More forms will likely be required to pay payroll taxes in other jurisdictions.
If managing all these components of payroll taxes sounds overwhelming, there is a solution. Oyster’s international payroll software makes managing payroll taxes simple, even with a global team.
Change the way your business handles payroll for the better by registering for an account today.
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