Payroll Taxes Simplified, Part I

The picture you see is what I looked like for the past two years as quarterly filings came due. It took me hours to make all the calculations, fill out all the forms, double-check that I had the correct forms, make sure I made the correct payments PLUS make sure I had the correct ones electronically-paid v. via snail-mail. Arg! I never looked forward to that time.

Luckily, I made it through those years with few mistakes (and none of them major). I have since wizened up and hired an accountant to take care of my payroll (which, BTW, is not NEARLY as expensive as I thought it would be).

So, why write this post? For all of you small business owners out there still trying to figure out the payroll tax system, my hope is that this will help organize your thoughts. This first part will simply define the different types of payroll taxes. The second part will cover the logistics, including your timeline, what needs to be turned in, when, and how.

(It is necessary that I make the following disclaimer: I am not an accountant. This post does not replace professional accounting advice. I have merely “been there, done that.” Find your nearby friendly accountant to confirm all this information, to provide you with professional advice, and to provide you with necessary specifics.)

So, you may be wondering, what are “payroll taxes”? They are the income, Social Security, Medicaid, and unemployment taxes. Some taxes are deducted from an employees payroll and some are paid by the employer. Here they are, in no special order:

1) Income Taxes. Income taxes are ONLY taken out of (a.k.a. deducted) from an employee’s gross wages (e.g. their monthly “salary”). There are federal income taxes and state income taxes. The amount deducted from an employee’s paycheck will depend on the number of deductions and their marital status per their W-4s. If you have employees, you need to have W-4’s on file for them. To determine the amount to deduct, you can either use payroll software OR the handy reference sheets provided by the IRS.

2) Unemployment Taxes. Again, there are federal unemployment taxes and state unemployment taxes. You may have heard of the terms FUTA (for federal) and SUTA (for state) – that’s these. Unemployment taxes are NOT deducted from an employee’s gross wages – they are ONLY paid by the employer. SUTA taxes are paid quarterly. FUTA taxes are paid quarterly IF they exceed $500.00; if less than $500.00 they can be filed annually.

3) FICA. I don’t know what the acronym stands for, but these are your Social Security and Medicare taxes. These are both deducted from the employee’s gross wages AND matched by the employer. Social Security taxes 6.2% from the employee’s wages and Medicare takes 1.45% from the wages. Again, this is matched by the employer. The employer will pay FICA quarterly, the equivalent of 12.4% for Social Security and 2.9% for Medicare.

4) Gross Wages v. Net Wages. This one took me awhile. “Gross wages” are the employee’s salary, what is negotiated in the contract. Gross wages are the bigger (“gross”) sums. “Net wages” are the employee’s take-home pay, after income taxes, FICA, and any other retirement or benefits are deducted from the gross wages. Net wages are like fishing nets – they are what the employee “catches” and takes home.

Okay – hopefully this helped clarify some of the terminology. Look for the next post for specifics about when, how, and what to file.

Tagged as: employee, employer, payroll, Private Practice, taxes