You are required as an employer to report on and deposit payroll taxes to the IRS and state tax authorities on your employees’ behalf. Employers also pay their share of payroll taxes to the IRS or state tax authorities. This article will help you understand the process of calculating, withholding, paying, and filing payroll taxes. Learn about payroll tax deposits and how much it can cost you to file payroll tax returns.

What Are Payroll Taxes?

Payroll taxes are the taxes you withhold from employees’ paychecks for income tax and FICA taxes (Social Security and Medicare). You must collect these taxes, pay them to the IRS, report on what was paid, and file payroll tax reports. You must also make payments for unemployment taxes and worker’s compensation coverage.  “Payroll taxes” refers to several different federal, state, or local taxes: 

Amounts withheld from employees pay for income taxes owed by the employees Amounts withheld from employee pay for social security and Medicare, which are Matched by amounts employers must contribute for social security and Medicare taxes (called FICA tax) Additional taxes paid by employers (not employees) for unemployment taxes and worker’s compensation

Payroll taxes are called “trust fund taxes” because they are held in trust for the owner (the IRS, Social Security Administration, and your state).

How to Prepare for Payroll Taxes

When it comes to payroll taxes, employers are responsible for: 

Collecting information from appropriate payroll tax documents from employees Withholding the amount indicated by the employee from their pay Correctly calculating payroll taxes and other employment taxes Setting aside amounts you must pay as an employer into separate accounts payable in your accounting system Paying payroll taxes to the IRS, states, and other taxing authorities Filing payroll tax reports in a timely manner

Federal Registrations

Before you hire your first employee, there are some tasks you must undertake and some registrations you will need to have. You will need an Employer ID Number (EIN), which means registering with the IRS. It’s easy to apply online and receive the number immediately.  You must also register with the IRS for payroll tax payments and reports. That registration involves signing up for the Electronic Federal Tax Payment System (EFTPS). The IRS doesn’t accept paper checks, so this is the only way to pay your payroll taxes. 

State Registrations

You must register with your state for income taxes, so you can collect, report and pay state-level income taxes from employee pay. In addition, you’ll need to register as an employer with your state’s employment bureau so you can pay unemployment and worker’s compensation taxes.  Finally, you must give information about all new employees to your state’s new hire reporting website. The states use this information to track employees to be able to garnish wages for child support. 

How Do I Calculate Payroll Taxes Deductions?

The employer calculates withholding and deductions from employee paychecks. You are responsible for withholding the appropriate amount of taxes from an employee’s paycheck. You must ensure that you are paying the government the appropriate federal income tax, FICA (Social Security and Medicare) taxes, and state income taxes.  The payroll tax process begins with paying employees. When you pay employees, you must withhold payroll taxes and other employment taxes from their pay. For each payroll, you must keep track of the payroll taxes you deducted and set aside money to pay your portion of those taxes as an employer. As required by federal and state agencies, you must report the taxes owed. Finally, you must make periodic payments of these taxes.

Payroll Tax Deposits

Payroll taxes are paid to the IRS, which then reports earnings and FICA contributions to the Social Security Administration (SSA). Employers must make these payroll tax deposits electronically through the EFTPS system.  Payroll taxes are paid to the IRS either semi-weekly or monthly, based on the total amount of payroll taxes you owe. If you have only a few employees and a small payroll tax liability, you pay monthly; if you have many employees and a more significant payroll tax liability, you pay semi-weekly.

Payroll Tax Returns

You must file a quarterly report with the IRS using Form 941, an Employer’s Quarterly Federal Tax Return. This return shows:

The amount you have collected for income tax withholding from employeesThe amount you have collected for FICA (Social Security and Medicare) from employeesThe total amount owed for FICA (including the employer portion of this tax)

You must also include the amounts you have deposited (monthly or semi-weekly) for these payroll taxes. If your deposits are less than the amount owed, you must pay the IRS. Form 941 is complex; take some time to read more details in this article.

Setting Up a Payroll System

You’ll need to take all this information and set up a system to do your payroll, beginning with new hire forms, including paying employees, submitting reports, and making payments to federal and state agencies.   Most business owners use a payroll software program or outsource to a payroll service to simplify this process. However, as an owner, it is helpful to understand the process, including the steps involved and the calculations used. You can utilize an accounting software program to stay organized with tax and payroll requirements, or you can do your own payroll and payroll taxes. If managing payroll is too overwhelming, consider hiring a payroll processing service to take over these tasks. The IRS requires employers to deposit payroll taxes by the 15th day of each month or by the next business day if that date falls on a weekend or holiday.