Employer (ER) taxes explained: Guide for business owners

Understanding employer responsibilities

What are ER taxes, and when it comes to payroll, what are an employer’s responsibilities? ER taxes include several types of payroll taxes employers must withhold from an employee’s taxable wages. The tax types are categorized as follows:

• Federal income tax withholding: The amount an employer withholds for federal income tax depends on the information provided on an employee’s Form W-4 and his or her earnings. It also depends on the chosen withholding method — the wage bracket method or the percentage method.
• Federal Insurance Contributions Act (FICA) tax: This includes Social Security and Medicare taxes. Employers and employees contribute to FICA, 6.2 percent towards Social Security and 1.45 percent towards Medicare. Employers must withhold an additional 0.9 percent from employees earning over $200,000 annually.
• Federal Unemployment Tax Act (FUTA) tax: Employers must pay 6 percent of the first $7,000 of each employee’s wages for unemployment. However, if an employer pays state unemployment taxes, the federal rate is reduced to 0.6 percent.

Employers must understand and manage these mandatory payroll taxes to ensure compliance. By accurately withholding and paying these taxes, employers fulfill their legal obligations and contribute to funding vital social programs.

Now that we better understand an employer’s responsibilities, let’s take a look at the math.

Calculating payroll tax withholdings

Calculating payroll tax withholdings correctly is crucial to complying with federal and state regulations. The process is straightforward, but with all the forms, it can seem a little unwieldy, which is why it’s essential to look at some comprehensive examples.

Step 1: Determining employee wages

Before calculating an employee’s withholdings, you must calculate his or her gross pay. Gross pay includes the base salary or hourly wage, commissions on sales, tips, and bonuses.

Typically, employers pay taxes throughout the year (i.e., quarterly, semi-annually, etc.). Therefore, it’s important to determine an employee’s gross pay per period, which refers to how much they make per check. For example, if an employee receives payment semi-monthly or twice per month, you can determine their gross pay per period by dividing their salary by 24 — the number of months in the year times two pay periods per month.

Step 2: Calculating employee tax withholdings

Once you have the gross pay, you’re ready to calculate tax withholdings, but you’ll need the employee’s W-4. The form contains information about filing status and the number of allowances, which can affect withholding amounts. A popular method for calculating the withholdings for ER taxes is the percentage method. You can find detailed steps for this method and others in the IRS Publication 15-T.

Step 3: Accounting for FICA taxes

Federal and state income taxes are not the only taxes that affect employers. Employers are also obligated to ensure FICA taxes, which are paid through equal contributions by employers and employees, are properly remitted to the government. The total FICA tax reflects a 12.4 percent Social Security tax and a 2.9 percent Medicare tax.

Step 4: Keeping accurate records

Accurate payroll records increase the ease of tax calculations. Payroll records include documents about gross pay, withholding allowances, and net pay for each pay period. Maintaining payroll records and tracking all payments to federal and state authorities is essential.

Following the above steps can help employers manage payroll tax withholdings and ensure compliance with tax regulations. Leveraging a tool, such as an employer payroll tax calculator, can simplify calculations.

Filing payroll taxes

Now that you understand how to calculate ER taxes using the various methods outlined in IRS Publication 15-T, let’s discuss the key forms, documents, and filing deadlines that underpin the filing process. As an employer, you need to focus on the following four forms when filing payroll taxes:

1. Form W-4: Employees fill out this form to indicate tax withholding preferences. It addresses specific allowances and other key factors.
2. Form I-9: The Employment Eligibility Verification form confirms employees are legally permitted to work in the United States.
3. Form 940: This is the employer’s annual federal unemployment tax return. It reports any unemployment taxes owed and is due on January 31.
4. Form 941: The quarterly federal tax return reports income taxes, Social Security, and Medicare taxes withheld from employee paychecks. It’s due at the end of each calendar quarter. For example, the first quarter’s form is due on April 30.

State and local forms vary. To learn more about local requirements, contact your state’s tax department.

Consequences of non-compliance

Non-compliance on the ER taxes front can result in less-than-ideal financial and legal consequences for businesses. Understanding these penalties can help businesses keep up with tax planning processes and ensure compliance.

A business that doesn’t file can face late filing penalties and accumulate interest obligations on unpaid taxes. Depending on how much time passes, a late filing might incur a failure to pay penalty, which is often a percentage of the unpaid tax.

If those responsible for collecting and paying ER taxes — business owners, corporate officers, and payroll managers — willfully fail to do so, they may face additional financial penalties and other unwanted attention from Uncle Sam.

Finally, employers who fail to comply with withholding requirements may lose eligibility for certain tax credits and deductions. The loss of these benefits is especially detrimental to small businesses, which may struggle to afford heightened tax liabilities.