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6 Payroll Tax Questions You Need Answered

Running payroll is more than writing your employees a check. You also have to make sure you’re correctly withholding taxes from your team and tracking your tax liability, so you know how much to pay the IRS and your state’s revenue department. Keep reading to learn the answers to your payroll tax questions.

1. What is an EIN?

Your employer identification number, or EIN, is your small business’s tax number. It’s kind of like your company’s Social Security number. The nine-digit number is unique to your business, and the IRS uses it to match your tax documents and payments to your company. You’ll include your EIN with every form you file and payment you remit.

2. What taxes do I withhold from each paycheck?

Every time you pay your staff, you will need to withhold certain taxes from their checks.

Unless your employee is exempt, you’ll withhold federal and state income tax. You’ll look at their federal and state W-4 forms to determine how much to withhold.

You will also need to withhold Social Security and Medicare taxes. Social Security is withheld at a flat 6.2% on the first $132,900 your employee makes during the year. You’ll also have to match that amount. You’ll withhold Medicare at a flat 1.45% on the first $200,000 your employee makes during the year. If they make more than that a year, you’ll start withholding an additional 0.9% in Medicare taxes after they’ve reached the $200,000 threshold. As the employer, you will also have to pay 1.45% on your team’s wages.

Some cities and localities have additional taxes that you might need to withhold. Talk to your local and state revenue departments to make sure you’re withholding all required taxes.

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3. What is unemployment insurance tax?

Unemployment insurance tax is a federally mandated program that helps provide former workers some financial security if they are laid off. Although the program is required by federal law, it’s regulated by each state, and you’re required to pay both federal and state unemployment insurance taxes.

You’ll pay federal unemployment insurance tax (FUTA) on the first $7,000 each of your team members earns. The FUTA rate is 6%, but depending on your state, you will likely only have to pay 0.6% due to a tax credit.

Each state determines its own unemployment insurance rates and sets its own requirements. Your state will typically notify you of your initial rate when you register your business. Your rate may change annually, as it’s determined by your industry, how long you’ve been in business, and how many unemployment claims your former employees have made.

Unemployment insurance is typically only paid by the employer.

4. What are pre-tax deductions?

Pre-tax deductions are any amounts you take out of an employee’s wages before calculating their taxes. Pre-tax deductions lower your worker’s taxable income, which can save them money. They include deductions like certain retirement plans and health insurance policies.

5. What payroll tax forms do I need to file?

At the end of the year, you will need to file a W-2 for every employee you paid during the year. If you paid any independent contractors, you will need to file 1099-MISC forms for them. Your workers will use the information provided on the forms to file their own income tax returns.

You will need to file Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return by January 31 of each year. This form lets the IRS know how much FUTA taxes you paid throughout the year and helps determine if you still owe anything.

You will also likely have to file Form 941: Employer’s Quarterly Federal Tax Return. This form is due at the end of every quarter and tells the IRS how much you paid your employees and withheld from their paychecks. If your annual tax liability is $1,000 or less, you might file Form 944: Employer’s Annual Federal Tax Return at the end of each year instead.

You will also need to file state payroll forms. Each state has forms to file to let them know how much you paid your team, how much taxes were withheld, and how much you’ve paid in unemployment taxes.

6. When do I pay my payroll taxes?

The IRS and your state will assign you a tax deposit schedule. The easiest way to make your federal tax payments is through the Electronic Federal Tax Payment System (EFTPS). Check with your state to learn the best way to submit your state tax payments.

For federal taxes withheld, the IRS will determine your tax deposit schedule by looking at your reported tax liability during a lookback period. The lookback period runs from July 1 through June 30 of the previous year. For example, the lookback period for 2019 starts on July 1, 2017 and ends on June 30, 2018.

If your tax liability for the current or previous quarter is less than $2,500, you’re likely a quarterly depositor and will remit your taxes when you file your Form 941.

If your tax liability for the lookback period was $50,000 or less or if you’re a new employer, you’re likely a monthly depositor. You will submit your payment by the 15th of the following month. For example, you will pay your May tax liability by June 15.

If your total tax liability for the lookback period was $50,000 or more, you’re likely a semi-weekly depositor. If your payday is Wednesday, Thursday, and/or Friday, you will pay your taxes by the following Wednesday. If your payday is Saturday, Sunday, Monday, and/or Tuesday, you will pay your taxes by the following Friday.

If you accumulate $100,000 or more in tax liability on any payday, you must deposit the taxes by the next business day.

States often use a similar method to determine when you need to pay your taxes. Check with your state’s revenue department to learn when to remit your payroll taxes.