Paying both federal and state taxes is a requirement that everyone should adhere to. It is your responsibility to ensure that your federal taxes are paid in accordance with the guidelines and rules outlined by the IRS.
Employers pay payroll taxes on a yearly or quarterly basis. However, payroll tax deposits are made depending on the amounts reported during the lookback period.
The lookback period helps in determining the amount of payroll taxes owed to the IRS by an employer. Once you establish the owed amount, it will be easier for you to develop a suitable deposit schedule.
When Should Payroll Tax Deposits be Made?
Payroll tax deposits are made either monthly, semi-weekly, or the day after.
Below we explain the requirements for each tax deposit period.
1. Monthly Deposits
These are for employers who reported $ 50,000 or less during the lookback period. Monthly deposits are paid not later than the 15th day of the month following the month you paid your employee.
For example, if you paid your employee on 30th April, The monthly payroll deposit should be made by 15th May.
2. Semi-Weekly Deposits
Deposits are for employers that reported $50,000 or more during the lookback period.
Deposits for employees paid on Saturday, Sunday, Monday, and Tuesday are deposited by the following Friday. While employees Paid from Wednesday, Thursday and Friday have their deposits made by the next Wednesday.
3. Next-Day Deposit
This rule applies to employees that accumulate taxes of $100,000 or more in a day, regardless of being a monthly or semi-weekly depositor.
In such a case, you become a semi-weekly depositor for the rest of the financial year and the one following.
In 2020, The CARES Act was passed by Congress, and on 27th March, President Donald Trump signed it. The Coronavirus Aid, Relief, and Economic Security (CARES) Act is to help ease financial burdens brought by COVID 19, especially to small businesses.
Payroll taxes have not been completely cut off but waivered from 27th March 2020 to 31st December 2020. By 31st December, employees should deposit at least 50% of the payroll taxes, and the balance fully paid off by 31st December 2021.
The lookback period is a twelve-month time frame that runs from 1dt July to 30th June.
Reports by the IRS data book in 2017 state that it collected $2.39 Trillion, which was 70% of the total Federal revenue. Showing that Payroll taxes are the highest contributors to Taxable income.
Most of the revenue from payroll taxes cover social security fund, medicare as well as defense and security.
What are Payroll Taxes
These are the taxes imposed on employees or employers based on the employees’ paycheck. Employees share some of the charges with their employers, while some employers pay all of them.
Employers and employees contribute equally to the Social security fund and the medicare funds. Employers fully pay for the (Federal Unemployment Taxes) FUTA and (State Unemployment Taxes) SUTA.
Types Of Payroll Taxes
1. Federal Income Tax
While there is a flat rate for medicare payroll tax and social services funds, the amount of income tax withholding is computed based on the employees’ gross earnings, W-4 forms, and bonus wages.
The IRS, as well as organizations, encourage employees to revisit the W-4 forms annually. This way, they can make adjustments according to any changes that may have occurred over the year.
2. Social Security Payroll Tax
Social security payroll taxes fund the Disability Insurance Trust Fund and the OASI (Old Age and Insurance Trust Fund). Its main objective is to provide a guaranteed source of income to disabled and retirees.
Several government representatives who are; commissioners of social security, Secretary of the treasury, Secretary of Labor, Secretary of Health and Human Services, and two public trustees oversee these funds.
The Social security Act was signed into law on 14th August 1935. High earners neither paid nor received the Social Security funds. However, this condition changed, and the contributions now rise with wages.
3. Medicare Payroll Tax
Medical Payroll tax deductions go to the Supplementary Medical Insurance Trust Fund, and the Hospital Insurance Trust Fund. Both of these medical insurance funds cover different things in case one is using insurance to pay for their medicare.
The hospital insurance Trust Fund covers Part A of medicare. Part A covers admission, inpatient, skilled nursing facility care, hospice care, health home care, as well as nursing home care.
The Supplementary Medical Insurance Trust Fund covers Part B of medicare. It includes ambulance services, clinical research, mental health services, some outpatient prescription drugs, and DME (Durable Medical Equipment).
Payroll Tax Percentages
1. Federal Income Tax
Imposed federal income tax is according to the employees’ earnings. A taxable income bracket sets the income tax amount, ranging from 10% to 37%.
For example, in 2019, individuals who earned less than $ 9,700 were subjected to a 10% income tax rate, the minimum bracket. Those who made $9,701 to $ 39,475 paid $970 plus 12% of the sum above $ 9,700.
Please note the taxable income bracket is adjusted each year for inflation, according to the Customer Price Index.
2. Social Security Payroll Tax
The payable amount for Social security is 12.4%. Employers and employees contribute 50% each. Employees contribute 6.2% of the gross income, and employers contribute the other 6.2 %. 6.2% is a flat rate for all earners.
3. Medicare Payroll Tax
The Medicare trust fund tax is 2.9%. Employers and employees each contribute 1.45% of the total of 2.9%. There is an additional 9% for employees earning over $200,000. The employer does not contribute to this 9%.
4. State Income Tax
The state income tax varies from state to state; some states pay state income tax while others do not.
Every state has an income tax, apart from Florida, Alaska, Texas, Washington, South Dakota, Wyoming, and Nevada. New Hampshire and Tennesse only tax dividends and interest income but do not tax wages.
1 out of 3 small businesses is faced with payroll penalties each year. Some of the reason for payroll penalties include;
1. Late Submissions
For deposits made late, penalties from 2% to 25% of the total payroll tax are faces.
- 2% for deposits made 1-5 days late
- 5% for deposits made 6 to 15 days late
- 10% for deposits made 16 or more days late, less than ten days before the date of the first notice.
- 10% of the total payroll tax is payable for amounts that were directly paid to IRS or with tax returns instead of depositing.
- 15% Amount still unpaid to the IRS 10 days after receiving the first notice or IRS asking for the tax due.
2. Trust Fund Recovery Penalty
If Federal payroll tax, social security payroll tax, and medicare tax funds are not withheld and deposited to the United States government, the penalty is an immediate payment of the 100% of the payroll tax.
In cases where the payroll tax is left unpaid, The responsible persons to make the deposits are held accountable and are subject to the Trust Fund Recovery Penalty. It could be anyone! An employee, an accountant, a volunteer, or even a partner.
You might want to go through your job description again to avoid such.
Man is to error, and well, a simple typo can result in a mistake or so. Minor payroll penalties a exempted if you have a valid reason. They include;
- Posting payments incorrectly
- Incorrect payroll tax submission schedule
- Use of incorrect or temporary employer identification number
Consequences of payroll tax mistakes are usually fines, Compound interest, and penalties. Severe cases can result in the closure of business and seizure of the organization’s assets.
One can also be subject brought to trial for willfully evading taxes, failing to file returns or pay taxes when due, Furnishing fraudulent Form W-2 or failing to furnish them completely, committing fraud, and providing false statements.
To avoid the payroll penalty, be sure to use payroll software that will make everything easier for you!