What is payroll tax and does it make sense to outsource payroll processing? Payroll taxes are enforced on employers or employees and are typically a percentage of the salaries that employers pay their employees. Payroll taxes generally include two parts: deductions from an employee’s wages and taxes paid by the employer based on the employee's wages. One of the most time-consuming aspects of business operations is payroll processing, which includes calculating employee payroll taxes like social security and Medicare taxes. It’s easy to make a mistake or miss a filing deadline, and fees and penalties add up quickly. Here are some basics to consider:
Statutory Payroll Tax Deductions
Employers report payroll by calculating gross monthly wage earnings and various payroll deductions to arrive at net pay. To calculate net pay, take the employee’s gross pay (pay rate times hours worked) and subtract statutory and voluntary payroll tax deductions. It seems simple but it’s easy to miss the small details.
Statutory payroll tax deductions are those an employer is required to withhold from an employee’s paycheck. Both employers and employees make contributions to these types of taxes. This category of withholdings includes the following:
- Federal income tax
- Social security tax
- Medicare tax
- Additional Medicare tax
- State income tax
- Various local taxes
Voluntary Payroll Deductions
Voluntary payroll deductions vary based on elections the employee makes. Voluntary deductions can be taken on a before or after-tax basis and may include the following:
- Health insurance premiums (medical, dental, and eye care)
- Life insurance premiums.
- Retirement plan contributions (such as a 401(k) plan)
There are many labor laws weaved into payroll tax. For example, wage deductions for health insurance coverage may constitute employee contributions to an employer-sponsored group health plan. Such plan is subject to the reporting, disclosure, fiduciary, enforcement and other provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Once all payroll taxes are withheld, employers must report and deposit the taxes in a timely manner. Payroll tax reporting is required by various state and local agencies. Here are some of the reporting requirements for employers:
- Make federal tax deposits
- File annual federal unemployment tax return (Form 940, 940EZ)
- File quarterly payroll tax return (Form 941)
- File annual return of withheld federal income tax (Form 945)
- Provide Wage and Tax Statements (Form W-2)
Because of all that goes into processing payroll taxes, some employers choose to outsource payroll to a payroll company or PEO. Here is an example scenario and the steps required with or without outsourcing payroll taxes.
ABC Company is ready to hire employees and wants to know how much federal income tax to withhold and where to send the money.
If ABC wants to handle payroll taxes on its own, here are the initial steps needed:
- Have each employee complete a Form W-4 to choose their withholding allowances.
- Use the IRS Employer’s Tax Guide to determine the amount of withholding and the directions for depositing what’s withheld.
- File Form 940, an annual Federal Unemployment Tax Return (FUTA)
- Learn whether Form 941, a quarterly federal tax return, or Form 944, an annual return, is required based on business size (monthly or semi-weekly deposits may be required as well).
- File a Form W-2 annually for each employee, along with a Form W-3
- Provide a copy of Form W-2 to each employee.
If ABC partners with a payroll processing company or PEO, then steps two through six are handled by the partner company.
One of the ways FrankCrum, a Florida-based PEO, adds additional value, is by providing clients with a dedicated Payroll Coordinator. The Payroll Coordinator becomes the point person for everything related to payroll, and often acts as a liaison between one or multiple departments. The same Payroll Coordinators work with the same clients during every payroll cycle. Therefore, they get to learn how their clients operate their businesses and can adapt payroll strategies to better serve them. Here are two ways Payroll Coordinators help clients process payroll.
- They pay employees accurately and on time
- They help employers remain in compliance
Payroll Coordinators at FrankCrum are part of a team of subject matter experts who can advise on a wide variety of challenging topics such as:
- Overtime pay
- FUTA, SUTA and FICA taxes
- Wage garnishments or other deductions from wages
- Classifying exempt and non-exempt employees
- Payroll taxes (federal and state)
- Accuracy of employee W4s and I9s
- Calculations of discretionary and non-discretionary bonuses and other types of additional pay
Whether you have questions about a tax rate, filing status or state unemployment tax, FrankCrum can help. Call 800-277-1620 to learn more about FrankCrum’s comprehensive payroll tax solutions.