If you have employees, then you are responsible for payroll taxes. The term payroll taxes lumps all the different forms of employment taxes into one category known as “payroll tax”. In reality, payroll taxes encompass Federal and state income tax withholding, social security and Medicare taxes (also known as FICA), Federal unemployment tax (FUTA), and any state and local unemployment taxes assessed. Payroll taxes are deducted each pay period from an employees gross pay and the remaining money that is distributed to the employee is what is known as “net pay”. In addition to any taxes deducted from an employee’s wages, there is a social security and Medicare liability incurred by the employer. As an employer, you must match the social security and Medicare amounts withheld for each employee. This is what’s known as the employer paid contribution. Until recently, most employers reported and paid payroll taxes quarterly; however, with the advent of the EFTPS, or Electronic Federal Tax Deposit System, taxes are now paid on a monthly basis by all employers. The payroll taxes may also be paid via a tax coupon that is taken to your bank and presented with the monies to cover the payroll taxes due; this must be filed by the 15th day of each month.

Every quarter, a Form 941 (or 943 for Agricultural employees) must be filed with the IRS and the amounts reported on the 941 should reconcile to the amounts turned in each month via the tax coupon or the EFTPS. At the end of the tax year, a Form 940 or information return must also be filed and all amounts reconciled and balanced between the Form 941, 940, and the W-2 forms and information returns filed.

If you are a small business with employees, or you plan to begin operating a business with employees, you need to understand your tax responsibilities as an employer; how can you accomplish this? The IRS provides links to all the relevant Forms and Publications via their internet site at www.IRS.gov; here you will find definitions and terms associated with employees from the onset of hiring, to termination. W-4’s, W-2’s, I-9’s, all the employment taxes you will be responsible for reporting, and all the rates associated with those taxes will be listed on this website. The IRS also provides you with information concerning recordkeeping, employment eligibility verification, benefit and retirement plans, and even the definition to be used in order to determine if someone is an employee or an independent contractor, it’s all there. There is a tremendous benefit to be had by investing the time and resources necessary to understand and comply with all the federal, state, and local regulations concerned with employees and payroll taxes; however, you should also frequently seek the advice of a qualified tax professional, your accountant.

Over the last several years, the limits and percentages for the deduction liabilities have been raised in order to ensure the continuation of the Social Security and Medicare programs as we know them today. The problem facing many employers and payroll professionals now is the maintenance of the system and the update of changes in percentage rates and income withholding rates.

Each year, you will be responsible for maintaining the withholding records on every employee, along with ensuring that the correct percentages are withheld, based on the current year’s earning levels. For wages above the current limit of $87,000, there are no Medicare or social security taxes withheld; however, the federal and state income tax continues, there is no limit for this taxation.

In recent years, we have all heard the rage over the lack of proper funding for the Social Security and Medicare fund; what many of the mid-range wage earners in America understand, however, is that they’re earnings are being taxed enough. How do we solve this apparently looming problem of funding? Well, the jury is still out on this one, but someone will have to make a decision soon, and I’m sure it will affect the vast majority of the millions of average wage earners, as they represent the biggest pot of money.