Paying small business payroll taxes can be complex. Reporting and payment schedules don’t always match up. Sometimes it’s not clear who pays what. The system has a lot of terms and acronyms to learn. And then there’s the math.
Let’s break down the process and identify a few resources that can help business owners get more comfortable — and maybe uncover some payroll tax relief for small business.
What Goes Into Payroll Taxes?
Payroll taxes have a lot of moving parts. To pay them correctly, you need to know where the money comes from and how much you need to collect.
You collect federal income taxes on your employees’ behalf. Depending on the employee’s income and filing status, you’ll withhold between 10% and 37% of their wages. You can calculate the correct withholdings using the withholding tables in IRS Publication 15-A.
You collect state and local income taxes on your employees’ behalf, too. Rates vary by state and locality; some don’t collect income tax at all. The Small Business Administration has more information on determining your tax obligations.
The Federal Insurance Contributions Act taxes cover three taxes that fund Social Security and Medicare. The current tax rate for Social Security is 12.4%, which is split evenly between employer and employee. For the 2020 tax year, the maximum Social Security liability is $8,537.40.
The current Medicare tax rate is 2.9%, and it’s also split evenly between employer and employee. Unlike Social Security, though, there is no cap on the Medicare tax. There’s also a 0.9% additional Medicare tax on top of the standard Medicare payment, but it only applies to employees who exceed a specific income threshold, the IRS says:
- Single, head of household or qualifying widower: $200,000
- Married, filing jointly: $250,000
- Married, filing separately: $125,000
Federal Unemployment Tax Act taxes fund unemployment insurance. Employers pay 6% on the first $7,000 of an employee’s wages. In some states, though, if you pay your state unemployment taxes in full and on time, you can get a credit that effectively reduces the federal unemployment tax rate to 0.6%.
Paying Your Small Business Payroll Taxes
You report your payroll taxes every quarter. But you deposit the withholdings on a different schedule. You’ll deposit most employment withholdings either monthly or twice a week, depending on the total tax liability you reported on Form 941. Unemployment taxes are deposited quarterly.
You must use the federal government’s Electronic Federal Tax Payment System to make federal tax deposits. If you don’t make your deposit on time, the IRS charges a 2% penalty. The penalty can reach as high as 15% for deposits made more than 10 days after your first IRS bill is due. The IRS lists important employment tax due dates and also offers additional tax education resources for small business owners.
Your state’s tax agency will tell you how to pay your state taxes. The Federation of Tax Administrators provides links to every state’s revenue or taxation agency.
Payroll Tax Relief for Small Business
If your business is struggling because of the pandemic, you might qualify for payroll tax relief. The CARES Act lets employers defer depositing and paying the employer’s share of Social Security taxes so that they can keep their employees during the pandemic instead of furloughing them or letting them go. The extra cash flow afforded by the CARES Act might help you meet other obligations and keep your doors open. You could also look at taking out a small business loan to get you through tough times.
Small business payroll taxes can be confusing, but collecting and paying them is part of being a business owner. The IRS offers an income tax withholding assistant that can help you calculate what you need to withhold from an employee’s wages. You could use a tax software solution to help calculate and file taxes and withholdings. You could outsource your taxes, especially if bookkeeping responsibilities aren’t your strength.
By understanding the process and getting the right help, you can make paying your small business payroll taxes as painless as possible.