Employer Tax Obligations

September 15, 2012 in , ,

Payroll taxes fall into the categories listed below. However, keep in mind that this is just a brief overview that is neither comprehensive nor complete for any specific business situation. To understand all of your payroll tax obligations, please consult the legal and accounting professionals you employ to advise your business.

  • Federal tax liability
  • Federal unemployment taxes
  • State and local income taxes
  • State unemployment insurance
  • Wage and tax reports
  • Disability
  • Food and beverage establishments
  • Workers’ Compensation

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Federal Tax Liability
Federal income tax, employee social security, and Medicare withheld are the actual amounts deducted from an employee’s pay based on percentages or formulas set by the government. While these typically come from employee wages, an employer is obligated to correctly calculate, deduct, and pay the government the proper amounts.

Employers also contribute a segment of the social security and Medicare taxes paid to the IRS. (The concept of employers simply “matching” employee contributions is a fallacy.) A business is liable for the entire tax due, regardless of the amount actually withheld from employees; therefore, the total liability is calculated, the amount collected from employees is subtracted, and the remaining amount is the employer’s portion.

Deposits are due on a quarterly, monthly, semiweekly, or next day basis depending on the amount of tax liability. However, quarterly and next day deposits are made only on an exception basis. Employers mandated for EFTPS must make their payments electronically, and file Form 941, Employer’s Quarterly Federal Tax Return, quarterly to reconcile taxes calculated versus taxes paid. Smaller employers may have the option of filing one annual Form 944 in lieu of four quarterly Forms 941.

Federal Unemployment Taxes (FUTA)
The Federal Unemployment Tax Act (FUTA) established the employer tax that finances the federal unemployment program. An employer’s liability for this tax begins January 1 of the year in which certain conditions are met.

When a business becomes liable, it is liable for the entire year, not from the point when one of the conditions was met. FUTA is strictly an employer tax, so no part of this tax can be deducted from employee wages. Employers mandated for Electronic Federal tax Payment Service (EFTPS) must make these payments electronically.

Each covered employer must file a Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, annually to report taxable wages paid during the year and reconcile quarterly FUTA tax deposits. FUTA deposits are only made quarterly if the employer’s liability for such quarter is over $500. If this threshold is not met, the liability carries forward into the next quarter(s) until the $500 deposit threshold is met.

State and Local Income Taxes
The variety of state and local taxes precludes a detailed description here. In general, every employer who pays employee wages is required to withhold income taxes from each payment of taxable wages, if required by the state or local taxing agencies. Not all states have withholding and many states do not have local taxing jurisdictions that affect payroll.

Some employers face particularly complicated state income tax situations. Those who conduct business operations in multiple states must meet the requirements of all the states involved. The same is true for those who have what may be called “dual-state” situations (employees living in one state and working 100 percent of the time in another state, or employees working in more than one state during a single pay period).

State Unemployment Insurance (SUI)
All states require employers to pay a state unemployment insurance tax. Although SUI is basically an employer tax, a few states have an employee tax as well. SUI is closely tied to the federal unemployment insurance program FUTA, which is collected from employers; however, compensation benefits are paid from the state fund. If the state fund is depleted, the state may borrow from the federal government.

Each state has a limit on compensation that is taxable for SUI. The wage limits vary by state. Each state assigns every subject employer a tax rate once a year based on their experience or merit rating.

Wage and Tax Reports
All states require employers to report employee wage and tax information each quarter. This usually includes the employee’s name, social security number, and gross wages paid for the quarter. This information is used to verify an employee’s eligibility for state unemployment insurance and the amount of compensation benefits to be paid.

The primary purpose of disability taxes is to provide benefit payments to employees absent from their jobs because of illness, accident, or disease not related to their employment. Disability taxes provide the fund from which this type of insurance is paid. Plans vary by state, with employers paying the full amount in some states, and employers and workers sharing the cost in others.

When a disability plan is 100 percent funded by employer contributions, and an employee receives benefits from that plan, the benefits must be included as part of the employee’s compensation. When the plan is 100 percent funded by employee money, any benefits the employee receives are tax free. In plans where both employers and employees contribute, employees are taxed only on that portion of the benefit related to employer contributions.

Food and Beverage Establishments
Restaurant payrolls are more complicated simply because there are several forms of compensation with varying tax treatments that can make up an employee’s paycheck. There may be regular compensation paid by the employer, tips and gratuities, banquet tips, service charges, meals, and lodging.

Federal and state laws define the responsibilities of the employer and employee and the taxability of the different forms of compensation. The employer is required to withhold FICA, federal, state, and local taxes, and pay FICA, federal, and state unemployment insurance on any compensation deemed taxable.

Meals and Lodging
Depending on the type of meals and lodging, the value may or may not be included as part of taxable compensation.

All tips are taxable to the employer and employee for social security and federal unemployment tax until the employee’s taxable compensation reaches the wage base limits for these taxes. All tips are fully taxable for Medicare and federal income tax. Generally, states and localities follow federal laws regarding the taxability of tips.

Workers’ Compensation
This is insurance for your employee for on-the-job illness or injury. Workers’ compensation rates are determined by the state and are based on the type of work your employees are doing and their claims experience.

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