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How to Calculate Payroll Taxes to Avoid Penalties in 2019

Posted by Dana Spinello, CPA on Feb 27, 2019 9:00:00 AM
Dana Spinello, CPA

Calculate payroll taxesSince most business owners don’t go into business to process payroll, many find themselves struggling to learn how to calculate payroll taxes and avoid the stiff penalties that come with making payroll tax mistakes. Penalties can be steep and get more expensive as time goes on in the following scenarios:

  • When employers don’t pay taxes
  • When employers pay taxes late
  • When employers don’t follow tax guidelines

There are several different federal, state and local taxes that could apply to businesses, so it’s no wonder that payroll taxes can confuse business owners. Both employers and employees contribute to payroll taxes, but the burden of remitting those taxes falls on the employer. Here’s a look at how to calculate payroll taxes to avoid penalties in 2019.

The following four types of taxes are deducted from employee wages:

  • Federal income tax
  • Social Security tax
  • Medicare tax
  • State income tax (not applicable in all states)

Click here to learn how to calculate payroll in three easy steps!

In 2019, the Social Security tax rate is 6.2% on the first $132,900 of wages paid, up $4,500 from last year. The Medicare tax rate is 1.45% on the first $200,000 of wages (plus an additional 0.9% for wages above $200,000). Social Security and Medicare taxes put together are called Federal Insurance Contributions Act (FICA) taxes. Employers pay FICA taxes too in the same amount as they withhold from employees, excluding the additional Medicare amount.

Federal and state income tax (if applicable) is more difficult to calculate because it varies by employee. The federal income tax paid by an employee is determined by how they fill out their Form W-4. Based on the number of exemptions and filing status they choose, an employer references the IRS income tax withholding table for the current year to see how much tax to withhold.

FUTA and SUTA Taxes

While not deducted from employee payroll, employers also need to keep up with federal and state unemployment taxes known as FUTA and SUTA, both of which are employer-funded. The Federal Unemployment Tax Act (FUTA) tax is up to 6% of an employee’s first $7,000 of gross pay and covers some unemployment benefits and administrative costs, among other things. The minimum FUTA tax is 0.6%.

The State Unemployment Tax Act (SUTA) provides for state level unemployment compensation programs. Rates vary significantly between states, and factor in the following criteria:

  • Industry
  • Whether or not a business is new or existing
  • How many former employees have filed for unemployment benefits
  • Overall unemployment rate in the state

Form 940 is used to file an employer’s annual federal unemployment tax return, but many employers must also make quarterly deposits if their tax obligations exceed $500 in a quarter. State unemployment programs generally require quarterly reporting and payments.

Payroll Tax Penalties

Both the federal and state governments can impose penalties, interest or fines if reports and tax returns are not filed on time. Here are just a few examples of payroll tax penalties for late deposits.

Deposits 1-5 days late 2% penalty
Deposits 6-15 days late   5% penalty
Deposits made more than 15 days late   10% penalty
Deposits remaining unpaid more than 10 days after the date of the first notice 15% penalty
Deposits not paid by EFT 10% penalty
   

Business owners can also be penalized 10% if the deposit is paid incorrectly - such as paying it with a personal tax return. Those who skip out on payroll taxes all together could find themselves with criminal penalties, imprisonment and additional IRS penalties. Someone convicted of willful failure to comply with federal employment tax laws can be fined up to $10,000 and/or be imprisoned for up to five years.

At FrankCrum, federal, state and local payroll tax calculations and reporting are handled for you. We automate deductions and tax withholdings from employee wages and remit the correct amount to the applicable tax agencies. We also create, distribute and file W-2s and 1099s for employees and independent contractors. Call 800-277-1620 ext. 4 to learn more about our payroll and tax solutions.

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Topics: Payroll, payroll tax

Dana Spinello, CPA

Written by Dana Spinello, CPA

Dana is the Senior Tax Manager at FrankCrum. Dana has been with FrankCrum since 2010 and oversees tax compliance, payroll tax administration and employment benefit tax planning. She has been a Certified Public Accountant since 2002. When she’s not working, Dana enjoys traveling and reading historical novels.

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Payroll Tax Changes 2019