The law to collect withholding taxes and various deductions in their employee’s paycheck known as the payroll tax mandates every company or business that hires employees. This kind of tax is usually managed, collected, and submitted by businesses or companies to the various tax agencies. According to the law, employers must deduct certain payroll taxes to their employees’ salary and the employers should also match the payments made by their employees. This is because the employers and the employees share the burden of the tax and the total payroll tax is equally divided between them.
Deductions Included in Payroll Tax
- Federal income tax withholding
- State income tax withholding
- Social Security tax withholding usually 6.2%. Due to the Tax Relief Act of 2010, Social Security tax withholding was reduced to 4.2%. However, this law is going to expire in 2013 and employee’s Social Security contributions will be back to 6.2%.
- Medicare Tax withholding about 1.45%
- Other local withholding taxes including unemployment insurance usually shouldered by the company, and state disability insurance.
Other employee’s may choose to pay for voluntary deductions, which will also be deducted on their paychecks depending on their choice. Most voluntary deductions are insurances and investments chosen by the employees. Examples of voluntary deductions included in payroll tax are dental insurances, life insurances, retirement plans, employee stock purchase plans or ESPP, and other expenses related to their jobs like uniforms, meal packages, and union dues.
If you are planning to set up a business, you should keep in mind that everything that you pay to your employees are subject to payroll tax. Unable to pay company taxes, unintentionally or deliberate, can provide problems to the business and may even result to administrative and criminal offense on the part of the owners. Aside from the regular salaries or wages of the employees, employers should also pay taxes for the vacation allowances, sick pays, bonuses, back pays, commissions, and even noncash or in-kind payments like foods, clothing and goods. You should also include additional benefits you give to your employees on the company’s payroll tax like country club memberships, airline tickets, and tickets to various games.
Since the payroll tax contributions and submissions are businesses and companies’ obligations, they should also make sure that the payments or the amount withheld from the employees are accurate. They should also accurately match the withheld amounts then submit the payroll taxes to the tax agencies or deposit in a bank authorized by the tax collecting agencies or institutions. Companies and businesses can choose to deposit payroll taxes either monthly or semimonthly depending on the money withheld by the employers.
Companies can also choose to pay the payroll tax through check or they can also opt for a more convenient option today - which is electronic payments. Companies can now send their payroll taxes electronically via the . Governments impose stringent rules when it comes to the payment schedules of payroll taxes. On-time payments can lead to incentives for the company while late payments of payroll tax can also lead to penalties and fines for the company.