Payroll and Tax Compliance For Employers
When you think of payroll tax compliance, legislation changes and withholding calculations probably come to mind. Even the most experienced payroll and HR professionals get headaches over compliance. However, payroll and tax compliance headaches don’t have to overwhelm you.
Whether you’re new to payroll and taxes, or a veteran still wading through pages of legislative documents, then this blog is for you. As you read, you’ll better understand what payroll tax compliance is and the difference between payroll tax and income tax. From there, you’ll find information on the specific forms required to complete a payroll tax process. Finally, you learn how partnering with a payroll provider can alleviate the burden of payroll tax compliance.
What Is Payroll Tax Compliance?
Payroll tax compliance is the process of withholding taxes from employee paychecks and paying those taxes on behalf of the employee to the U.S. government. This process has to follow strict guidelines to ensure taxes are consistent across three different entities: employees, employers, and the government. But, how does this process work? Let’s take a quick look at how this process works for each group:
- Employees: Local, federal, and state payroll taxes are withheld from an employee’s paycheck. These taxes consist of income taxes, Social security taxes, Medicare taxes, and other state and local taxes.
- Employers: Employers follow local, state, and federal payroll tax guidelines to ensure taxes are collected from employee paychecks on time. Each quarter that employer reports tax withholdings to the required governing authority.
- Governing Authority: The IRS requires most businesses with employees to withhold federal payroll taxes, with several states and local cities requiring additional withholdings. Some states, however, don’t require withholdings or only tax income from interest or dividends, which is why it’s essential to check your local guidelines frequently.
Now that you understand which entities are involved in payroll and tax compliance let’s move on to another critical question: how does payroll tax work?
Payroll Tax vs. Income Tax
What is payroll tax? Payroll taxes usually refer to taxes withheld from employee pay based on a specific rate. These taxes fund programs like Social Security and Medicare. Businesses pay an employer share of payroll taxes and submit them via Form 941.
Income taxes fund the U.S. Treasury. They are taxes deducted from employee wages based on Form W-4, which considers an employee’s marital status, new life event, and additional amounts an employee wants to be withheld from their paycheck. Employer responsibilities for payroll taxes include providing workers with copies of their income tax information in the form of W-2s each year.
While payroll taxes and income taxes are often summarized together, the two are very different. Understanding payroll taxes is essential for employers so they can remain compliant with local and federal regulations. Utilizing a payroll and HR provider who keeps track of payment deadlines can also help. These providers can file payments on your behalf to prevent payroll mistakes and help you maintain overall payroll and tax compliance.
Interested In Streamlining Your Organization’s Compliance?
Federal Payroll Taxes
Federal payroll taxes are used to fund different federal programs. These come in the form of:
- Income taxes withheld from employee wages
- FICA taxes split between employees and employers
- FUTA taxes, which are solely paid for by employers
While federal tax compliance requires employers to withhold income taxes from an employee’s wages based on the information provided on their Form W-4, FICA taxes are withheld based on a set percentage. FUTA taxes are also based on a fixed percentage but only applicable to employers. Let’s look at a breakdown of federal payroll tax rates and how each tax grouping makes up federal payroll taxes.
The U.S. currently has seven federal income tax brackets for different income levels. Employers are required to utilize these brackets to conduct income tax withholdings from employee wages. National income tax rates are progressive, which means when taxable income increases, your income then gets taxed at higher rates. Different rates are weighted against income brackets depending on the employee’s filing status.
Compliance with FICA, which stands for the Federal Insurance Contributions Act, is based on a U.S. federal payroll tax calculated on a percentage of wages. It is used to fund Social Security and Medicare and is paid for by employers and employees. Both tariffs are split equally among workers and employers so that each pays 7.65% of the 15.3% total requirement. Here’s a breakdown of that percentage:
- Both employers and employees pay Social Security taxes at 6.2%
- Both employers and employees pay Medicare taxes at 1.45%
Employers are also required to withhold an additional 0.9% Medicare tax if an employee is married, files jointly, and has annual wages are greater than $200,000 or $250,000.
FUTA, which stands for Federal Unemployment Tax Return, funds the federal government’s employment insurance. Employers must pay FUTA taxes every quarter and file them on Form 940 annually.
The amount an employer pays is approximately 6% of the first $7,000 in wages paid to an employee. However, most employers are entitled to a credit of 5.4%. This credit reduces the amount an employer owes in FUTA tax to 0.6%. Generally, you’re entitled to this credit if you paid your state unemployment taxes in full, on time, and the state isn’t determined to be a credit reduction state.
State Payroll Taxes
State payroll taxes are taxes comprised of state income taxes and unemployment taxes. They differ based on the source of tax payment: the employee or the employer. Employers pay these taxes through employee W-4 withholdings and percentages of employee withholdings. Here’s a breakdown of each tax and how you can navigate it as an employer.
State Income Tax
State income taxes, like FICA taxes, are monetary amounts employers must withhold from employee wages. Employer payroll taxes by state vary; unless your organization is located in a state that doesn’t have an income tax, it’s an employer’s tax obligation to deduct these taxes from employee wages. States with no state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
The State Unemployment Tax Assessment (SUTA) is a type of payroll tax used to provide unemployment benefits to workers. It is a tax that only employers pay unless you have employees in Alaska, New Jersey, and Pennsylvania. Employees in those states are required to pay state unemployment taxes or SUI. SUTA can mean a few different things depending on the state in which you operate. Other names for SUTA are:
- State Unemployment Insurance
- State Reemployment Tax
SUTA is based on a percentage of an employee’s taxable wage base. While some states apply formulas to determine the taxable wage base, others use a portion of the state’s average annual wage or follow the FUTA wage base. For employers to be SUTA compliant, each state requires employers to submit a quarterly contribution and wage report
Need a Complete List of State Wage Bases?
Local Payroll Taxes
Local payroll taxes are taxes imposed by city, county, or parish governments. Local taxes vary greatly depending on the country or city in which your business operates. For example, San Francisco, California, has a local income tax of 1.5%. This tax applies to both residents and nonresidents who work in the city. As an employer, you could expect to withhold this tax from your employee’s paychecks and pay it to the proper governing authority.
These types of taxes fund local programs such as education grants, parks, and community improvement. A good rule of thumb is to check with your local tax department to see whether they collect additional employer taxes.
Payroll Tax Forms
With so many different taxes, it can be challenging to know which government form applies to each. However, as an employer, it is your responsibility to understand which documents you need to fill out to remain compliant. Let’s look at the different forms you will need to consider when handling payroll taxes and how often you must file these forms to stay compliant.
The Employment Eligibility Verification Form (Form I-9) is used to verify the identity and employment authorization of individuals hired for employment. This form is provided by the United States Citizenship and Immigration Services (USCIS) to help employers avoid hiring unauthorized individuals for work.
Form I-9 consists of three main parts:
One part for an employee to establish their identity.
One part for an employer to verify employee documents.
One part for an employer to refresh information based on a rehire.
This form requires information like passports, identification cards, birth certificates, etc., that verify citizenship levels and employment eligibility.
The USCIS requires employers to store Form I-9s with personnel records onsite or at an off-site storage facility. These forms can be stored electronically, via paper, or microfilm. While businesses don’t have to refresh their I-9s as new versions are released, they are required to update them when an employee’s employment authorization document (EAD) or receipt thereof expires.
A W-2 form, also known as a Wage and Tax Statement, is the tax form used to report employee wages for the previous year. Unlike a W-4, which tells employers how much tax to withhold from employee paychecks, Form W-2 is a statement that provides employees with information about the previous tax year. Form W-2 determines whether a person owes the IRS a tax payment or is getting a refund during tax season. It includes information on taxable income, Social Security and Medicare income, and state income.
All organizations with non-contract workers making at least $600 must give those employees a Form W-2. Employers are also required to provide employees with copies of Form W-2 each year at the end of January to report their earned wages to the IRS for tax filing purposes. Companies will send these copies, known as Copy A of their employee’s W-2s, to the IRS, Social Security Administration (SSA), and other governing authorities along with a Transmittal of Wage and Tax Statement (Form W-3) to fulfill their payroll tax obligations.
Interested In Learning How To Avoid W-2 Errors?
The W-4 is a form that employees complete and give their employers to indicate how much money to withhold from their paycheck for federal taxes. It’s different from a W-2 in that it’s what an employee completes and files with their employer.
If you’re an employer, the Form W-4 will tell you pieces of information like an employee’s filing status, job adjustments, amount of credits, amount of other income, amount of deductions, and any additional amount to withhold from each paycheck. This combination of information is used to compute the total amount of federal income tax that needs to be withheld from employees’ pay.
An employee must complete the form when they start a job and before processing their first paycheck. The IRS recommends that employers remind employees to submit a W-4 each year or as often as necessary to reflect any life changes. Such changes include but aren’t limited to a marriage, a new baby’s birth, additional jobs, etc.
Our blog, What’s the New W-4 And How Does It Affect Me, is an excellent resource for employers and employees navigating W-4s. It provides the information you can use to ensure employees are not overpaying or underpaying on federal taxes during the year.
IRS Form 940 is the federal report form for unemployment taxes. Each year in January, businesses file this form to report and pay unemployment taxes to the IRS. It calculates a business’ federal unemployment tax liability and makes adjustments based on state unemployment taxes paid. Businesses have to file Form 940 if:
Employers paid wages of $1,500 or more to employees in a calendar quarter of the year.
Employers had at least one employee for 20 or more weeks during the calendar year. Employers must count all full-time, part-time, and temporary employees, but not owners or partners.
Form 941 is the federal payroll tax return for employers. Information reported on Form 941 includes wages paid to employees, reported tips, federal income taxes withheld from employee paychecks, Social Security taxes, and Medicare taxes. This report is also used to pay the employer portion of Social Security and Medicare tax.
Form 941 is Due By the Last Day of the Month That Follows the End of the Quarter
|The Quarter Includes||The Quarter Ends||Form 941 is Due|
|January, February, March||March 31||April 30|
|April, May, June||June 30||July 31|
|July, August, September||September 30||October 31|
|October, November, December||December 31||January 31|
This form is filed quarterly and usually due a month after that quarter ends. For example, if you pay employee wages anytime from January to March, you must file Form 941 by April 30. If the due date for filing federal payroll taxes falls on a Saturday, Sunday, or legal holiday, you may file the return on the next business day. For a list of legal holidays, click here.
What Happens If An Employer Is Non-Compliant?
According to a National Small Business Association study, business owners pay over $83,000 in regulatory costs in their first year of operation. If your organization isn’t utilizing the proper tax forms or filing taxes promptly, your business increases its risk of overpaying or underpaying employer taxes.
If a payroll or HR manager fails to pay payroll taxes quickly and accurately, the organization is still responsible for those taxes. Not paying them leaves your company vulnerable to compliance fines or penalties. Some of these penalties include:
Underwithholding tax penalty
Late file penalty
Tax fraud penalty
Failure to file penalty
Trust fund recovery penalty
Accuracy related penalty
These penalties can cost a business anywhere from 0.5% to 25% additional expenses per month on the outstanding tax balance. They don’t even take into account any local or state government late fees an employer might incur.
On the one hand, insufficient withholding penalties are expensive. On the other hand, if you overpay your taxes, your organization is losing money to unnecessary operating expenses. Luckily, many payroll and HR platforms offer payroll processing with tax compliance.
Benefits of Leveraging Payroll Tax Compliance Software
Each year thousands of payroll professionals, HR personnel, and business owners have trusted payroll and HR software providers to manage payroll and tax compliance. Payroll and HR technology can help with keeping up to date with payroll legislation. Let’s a closer look at a few benefits of payroll tax compliance software:
Payroll and HR solutions can track expiration dates and provide dashboard alerts to streamline employee classification reports year-round. This cloud-based documentation allows HR professionals to see which employees require updated forms quickly. HR avoids W-2 errors, and information is kept accurate and up-to-date.
Secure Data Storage
Several payroll and HR solutions offer tax form libraries and online document management, making it easier to store all of your essential employee documents electronically in a secure, unified database.
Most payroll providers offer tax compliance services that will pay and file your federal, state, and local taxes on your behalf. You save valuable time when you don’t have to stress about submitting your payroll taxes. Furthermore, it also protects your company from paying potential fines for incorrect payroll tax filings.
Tax Compliance Experts
Some payroll providers have experienced payroll tax compliance staff who operate on your behalf as the reporting agent. These personnel use defined processes to manage tax funds daily and ensure payroll filings and payments are accurate and up-to-date.
Ensure the provider utilizes the Electronic Federal Tax Payment System to make payroll tax payments on time.
How APS Can Help With Payroll Tax Reporting
APS helps organizations of all sizes and industries with their payroll and tax administration needs. We understand you need information and support. That’s why we closely monitor all tax regulation changes to ensure we minimize customer compliance burdens. Whether it’s our secure document storage or our report tracking, we can help you mitigate compliance headaches. Here’s how:
- Our secure, centralized database stores and tracks required tax forms for employees for better payroll and tax compliance.
- Our Analytics and Reporting solution provides employee classification reports so that you can maintain compliance.
- Our payroll and tax compliance experts file federal, state, and local tax filings and payments as the reporting agent on your behalf.
- We provide wage garnishment services, including the calculation and processing of garnishment orders, so you don’t pay unnecessary penalties.
- Our built-in error checking algorithm and validation rules allow you to review incomes and deductions before processing payroll to ensure accuracy.
- Our tax compliance department also assists you with year-end processing, saving you time and money.
In addition to these services, we stay on top of new payroll tax laws and procedures to alleviate our customers’ burden. We update our Help Center and ensure our customer support team speaks with clients regularly to make payroll and tax compliance adjustments.
To learn more about what APS can do to help you get compliant, contact us today.
Check out more great articles from the APS Blog covering HR, payroll, and everything in between.
The grant reporting process can be intimidating, especially if you’ve never written one. This page has everything you need to know to write an amazing report!
Learn seven tips for year-end payroll processing so you can proactively and efficiently avoid compliance errors.
APS has been recognized as a top HR software in the Midyear Software Advice Frontrunners report by Gartner. Learn more!
Learn the different types of electronic payment methods available for employees as well as the benefits of offering paperless options.
Wondering what the difference is between pre-tax deductions and post-tax deductions? We explain the differences and what they mean. Learn more.