Part 7 in an eight-part series on Becoming an Employer.
Once you set up your payroll system and begin to pay employees, you will deduct taxes from each paycheck, including state and federal income tax, Social Security, and Medicare. Other possible taxes include local taxes or school district taxes in some states. As the employer, you will also contribute your share toward the employee’s Social Security and Medicare funds, as well as federal unemployment tax (FUTA) and state unemployment tax (SUTA).
In most cases, you will deduct federal income tax, as well as Social Security and Medicare taxes, for your employees. You can figure these amounts by hand using tax tables found in Circular E. If you use payroll software, your payroll system will calculate the payroll tax deductions based on the withholding exemptions, filing status (married, single, head of household, etc.), pay frequency (biweekly, weekly, semi-monthly, etc.) and wages you enter for your employee.
In general, these are the components of payroll taxes, deducted from gross pay to arrive at net pay:
… minus federal income tax
… minus state income tax
… minus Social Security (FICA)
… minus Medicare (FICA)
… minus state and local taxes = NET PAY
Federal Tax Deposits
When you deduct these payroll taxes from the employee, you must make a federal tax deposit of the funds in a timely manner. As the employer, you will also contribute a share of Social Security and Medicare toward this deposit.
A typical federal payroll deposit for the month would include:
- Federal income tax withholding
- Medicare, employee’s share
- Medicare, employer’s share
- Social Security, employee’s share
- Social Security, employer’s share
How to Make Payroll Tax Deposits
Most employers must now use the Electronic Federal Tax Payment System (EFTPS) to make electronic payroll tax deposits. When you hire your first employee, set up your account with EFTPS to start making your federal tax deposits in a timely manner.
The Internal Revenue Service will determine the frequency of your payroll tax deposits based on your payroll amounts. For the first year, new business owners who have never filed Form 941 should be a monthly schedule depositor. Your federal tax deposit will be due the 15th of each month for the previous month’s payroll liabilities (note: with EFTPS, you need to initiate the transaction a few days before the deadline.) For more information, read Patriot Software’s training articles about EFTPS.
You must also use EFTPS to make federal unemployment deposits (FUTA) anytime your quarterly FUTA liability exceeds $500. FUTA is assessed on each employee’s wages up to a statutory wage limit (currently set at $7,000).
State and Local Tax Deposits
Rules and methods vary among states and municipalities, and the variations are too numerous to include here. New business owners should consult their state department of taxation and any pertinent municipality tax agencies for this information.