Tax preparation is a skill that can be acquired with a great deal of effort and education on the part of an accountant or payroll manager. However, most small business owners don’t have time to study the basics of tax preparation, much less obtain the skills and expertise necessary to properly handle payroll taxes. This quick guide from the payroll processors at Padgett Business Services® makes it easy for the busiest of small business owners and their employees to navigate common terminology in the tax or payroll industry:
Federal Withholding Tax (FWT)
Refer to the employee’s W-4 to see the percentage of their income withheld each paycheck for income taxes.
Social Security Tax
Most businesses are required to match their employees’ 6.2 percent tax rate for Social Security, making the total Social Security tax rate 12.4 percent per employee. Certain wages do not apply to this tax, including health savings accounts, retirement planning services, employee stock options, accident benefits and general health benefits. In these instances, you will see gross income appropriated to these categories prior to taxing for Social Security or Medicare.
For all employees with wages less than $200,000 in a calendar year, only 1.45 percent must be withheld from the both the employer and the employee. However, employees who exceed that annual amount must pay an additional 0.9 percent tax due to a new requirement instated by the IRS in 2013.
State Income Tax Withholding
Again, refer to the employee’s W-4 to appropriately deduct their preferred tax rate from their gross income. Most employees see this amount refunded during annual income tax returns.
Employees may be subject to city or county local tax withholding as well as state disability or unemployment insurance. Check with your state’s IRS chapter for more information.
Voluntary payroll deductions, on the other hand, are deducted from an employee’s gross income post-taxes. The categories set aside for these deductions include:
- Health insurance (which combines medical, dental and vision)
- Life insurance
- 401(K) or IRA contributions
- Participation in ESPP or ESOP (employee stock options)
- Union dues
- Meals during hours worked
- Uniforms for the job
DO check Publication 15 and/or Publication 15-B to determine when these amounts should be deducted, as some may need to be appropriated before payroll taxes. DON’T force employees to participate in any voluntary deductions; not only is this practice unethical, but it is often illegal as well and will prompt an audit.
As an employer, it is your responsibility to pay the required amounts for federal and state unemployment taxes (FUTA and SUTA). The business’ FUTA, SUTA, Medicare, and Social Security taxes PER employee are outside of the wages the employee has earned during a payroll period.
Taking care of payroll tax for each employee can be a daunting task, but with proper education and training for new payroll requirements, it is feasible. For those who want to relieve the burdens of payroll processing, there are outsourced payroll options that are excellent for small businesses throughout North America. Look no further than Padgett Payroll Services®!
Padgett Business Services® extended their payroll manager services to assist small businesses throughout the U.S. and Canada. You can now select our trusted customer service representatives to process employee payroll taxes for you. Get started today by calling (706) 548-1040 or fill out our contact form!