How to pay payroll taxes

Published

Jun 20, 2024

Author

For any business with employees, understanding and managing payroll tax obligations is an important aspect of your financial responsibilities as a business owner.

In this guide, we cover the basics of how to pay your payroll taxes, including how to properly calculate amounts owed, handle withheld funds and, of course, remit payment.

What are payroll taxes?

Payroll taxes are the taxes paid by employers and their employees on employee wages, salaries and tips. Employers play a critical role in this process, as they withhold employees’ portion from their paychecks and pay it on their behalf, along with their own employer-specific taxes. Revenue generated from these taxes funds important federal government programs such as Social Security and Medicare, as well as state-specific insurance programs.

Employees have one responsibility in this system: to pay their taxes. Luckily for them, the work of actually calculating what they owe and making sure the Internal Revenue Service (IRS) receives the money, falls on their employers.

To better understand how the system works, let’s look at an example:

Anne lives in Georgia and makes $96,000 a year working as a Marketing Manager for Acme Corp. Her FICA taxes should amount to 7.65% of her taxable compensation. (That’s 6.2% for Social Security, plus 1.45% for Medicare.)

Instead of asking Anne to monitor changes in tax rates and set aside money every month for an annual payment, the IRS requires Acme Corp to do the calculations on her behalf and deduct the correct amounts from her monthly paycheck:

Social Security: $8,000 x 6.2% = $416
Medicare: $8,000 x 1.45% = $116
Total: $416 + $116 = $532

Every month, Acme Corp. deposits $532 with the IRS on Anne’s behalf. When she receives her annual W-2, she’ll see the total amount paid on her behalf reflected for the IRS to confirm.

In addition to calculating, withholding, and depositing their employees’ contributions, companies have their own employer payroll taxes to pay. These include Federal Unemployment taxes (FUPA) and State Unemployment (SUPA) taxes.

Types of payroll taxes

Generally speaking, payroll taxes fall into three categories: federal, state, and local.

Employer

Employee

Federal

FICA, FUPA

FICA, federal income tax

State

SUPA

State income tax

Local

City or country taxes

Depending on where your business operates, you may find yourself withholding different types of payroll taxes for your employees based on state-specific requirements. It’s important to review your state tax code regularly to maintain compliance.

Employer responsibilities

Employers have four key responsibilities when it comes to payroll taxes:

Correct calculation. Employers properly classify workers and apply the correct tax rates to calculate each employee’s contributions.
Proper withholding. Employers must ensure that the employee’s contributions are deducted from each paycheck.
Prompt payment. Employers must deposit their employees’ withheld taxes and their own contributions either monthly or semi-weekly.
Filing tax returns. Employers must file regular tax returns with federal and state authorities reporting payroll taxes withheld and paid.

Failure to meet your payroll tax responsibilities as an employer can have serious financial and legal consequences. Incorrect withholdings and late payments can accrue hefty fines—up to 15% of the amount owed. In cases of continued or willful non-compliance, the IRS may issue a tax lien against your business’s property and bank account, or even bring criminal charges.

Setting up a payroll tax system

The best way to ensure that you meet your payroll tax obligations? Develop an internal system that takes advantage of automation and electronic filing to calculate and deposit your withholdings.

Register with tax agencies

The first step in setting up your payroll tax system is to register with the federal, state, and local agencies responsible for processing your returns and collecting your payments.

At the federal level, you’ll register with the IRS. Once you receive your Employer Identification Number (EIN), you can also set up an account with the Electronic Federal Tax Payment System and arrange auto debit payments for your FICA and FUTA taxes.

At the state level, you’ll register with the Department of Revenue, Comptroller General, or Department of Tax Administration. The exact agency and its procedures will vary, so it’s important to review the requirements carefully.

Some cities, such as New York and Los Angeles, also require employers to withhold municipal taxes on behalf of resident employees. In some cases, the state Department of Revenue will collect the fund on behalf of the city, but not always.

Choose a payroll system

Your payroll system does more than automate your payroll processing, it can also keep you compliant when it comes to your payroll taxes by calculating withholding, generating mandatory reports, and preparing tax forms.

When choosing your payroll system, look for a solution that automatically calculates your federal, state, and local taxes along with employees’ net pay and files the required forms on your behalf. Some payroll systems also connect directly with your financial institution and electronic payment systems to automate your payroll tax deposits.

Other important features include reporting and records. Online platforms can simplify the process of reporting and transmitting wage and withholding information using paperless Forms W-2 and Forms 1099. Your reporting needs may change as your business evolves, and it is important to select a solution that can grow with you as your needs become more complex.

Withholding and depositing

It’s important to understand the difference between withholding payroll taxes and making a deposit or payment to the IRS.

Withholding refers to the practice of setting aside a portion of your employee’s gross pay to cover his or her tax contributions. This takes place every pay period.
Depositing refers to when you, the employer, transmit the money you withheld to the IRS or state tax agency on behalf of the employee. This takes place semi-weekly, monthly, quarterly, or annually, depending on the particular tax.

While you’re not required to place withheld payroll taxes in a separate bank account, it may make sense to do so if you intend to set up automatic payments.

When it comes to payment, the IRS accepts multiple methods for payroll tax deposits, including ACH wire transfer and debit card. That said, the agency’s own Electronic Federal Tax Payment System (EFTPS) is the easiest, fastest way to pay.

After enrolling with the EFTPS, you’ll have the option to set up an automatic deposit schedule, with planned transfers on or before the due date for each payment. Every month on the scheduled date, the EFTPS initiates an automatic funds transfer and you receive immediate confirmation of a direct deposit.

Payroll tax filing and reporting

Just like individuals, businesses also file tax returns with the IRS. Depending on the type of tax, your business will need to file either quarterly or annually.

Form 941, the employer’s quarterly Federal Tax Return, is due no later than the last day of every quarter (April 30, July 31, October 31, January 31).
Form 940, the employer’s annual FUTA Tax Return is due by January 31 of the following year.
Form W-3, the employer’s annual Transmittal of Wage and Tax Statements is due to the Social Security Administration by January 31 of the following year.

The IRS prefers that employers e-file their employment tax forms for reasons of efficiency and traceability. If you’re confident in your skills, you can prepare and file the forms yourself. For more complex business structures, it may be helpful to enlist the help of a tax professional to handle this part of the process.

Compliance and record-keeping

Maintaining accurate records protects your business from unnecessary penalties should the IRS have questions about how and when you paid your payroll taxes. Beyond copies of your Forms 941 and employees’ Forms W-2, you’ll also want to retain copies of payslips, timecards, employee social security numbers and other information that can help federal agencies verify that you’ve paid correctly and on time.

IRS regulations require that you maintain records of all employment taxes withheld and paid for at least four years after the tax becomes due or is paid, whichever is later.

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FAQs

Do self-employed people pay payroll taxes?

Yes, self-employed people pay payroll taxes, but at different rates than traditional employees. FICA taxes for a small business owner are double those of an employee, for example, because the individual must take over the employer’s share.

On the other hand, self-employed people do not pay FUTA taxes and are not subject to personal income tax withholding.

When are payroll taxes due?

The exact due date for an employer’s payroll taxes will vary depending on the particular tax and the total tax liability.

What are the current federal payroll tax rates?

The Social Security Tax rate is set at 6.2% of an employee’s taxable wages, with a required employer match of 6.2%. The Medicare tax rate is 1.45% of an employee’s taxable income, though some employees may also be subject to an additional medicare tax.

The Federal Unemployment Tax Act (FUTA) also requires employers to pay 6% of the first $7,000 of every employee’s annual wages to fund federal unemployment insurance programs. Businesses that pay on time receive a 5.4% tax credit, however, which reduces the FUTA tax to 0.6%.

What are the current payroll tax rates for each state?

Each state sets its own payroll tax rate based on budget needs and priorities. To help you understand your obligations, we’ve prepared a set of comprehensive state payroll tax guides:

This blog is based on information available to Rippling as of June 7, 2024.