Payroll Tax Liabilities: Know the Details
On the federal level, employer-only taxes include Social Security tax, Medicare tax, and federal unemployment (or FUTA) tax, which are administered by the Internal Revenue Service (IRS). On the state level, employers are on the hook for state unemployment (or SUTA) tax, which is administered by the state workforce agency.
Although these employer payroll taxes may be commonly known, others, such as employment training tax and transit payroll tax, are less prevalent because they are based on location. Let's take a closer look at what employers may be responsible for when it comes to their portion of payroll taxes.
Social Security and Medicare Taxes
Both employers and employees are subject to Social Security and Medicare taxes. For 2019, employers and employees paid Social Security tax at 6.2 percent, up to the annual wage limit of $132,900. (The limit rose to $137,700 in 2020.) They also pay Medicare tax at 1.45 percent, on all wages.
Employers remit their portion of Social Security and Medicare taxes plus their employees’ Social Security tax, Medicare tax, and federal income tax withholdings, together, to the IRS, either monthly or semiweekly. Most employers file quarterly wage and tax reports with the IRS on Form 941.
You might be allowed to file your reports annually, on Form 944, if your total tax liabilities equal $1,000 or less for the year. Total tax liabilities include your share of Social Security and Medicare taxes plus your employees’ federal withholdings.
Federal Unemployment Tax
Generally, employers are liable for FUTA tax if they paid $1,500 or more in wages for the calendar year. For 2019 and 2020, employers pay FUTA tax at 6 percent on the first $7,000 paid to each employee. But, if you meet the requirements, you can take a maximum credit of 5.4 percent against your FUTA tax, which reduces your FUTA rate to 0.6 percent. (These numbers are subject to change; keep in touch with your financial professional.)
Employers typically must remit FUTA tax to the IRS by the final day of the first month that comes after the end of the quarter, plus file annual reports on Form 940 by January 31.
State Unemployment Tax
Employers pay SUTA tax on wages paid to each employee, up to the annual wage limit, at the rate determined by the state workforce agency. SUTA tax rates usually are based on whether the employer is new or experienced and on the employer’s industry. Most employers must file quarterly wage and tax reports with the state workforce agency. But, exceptions may exist. For example, domestic employers often are required to file annual, not quarterly, reports.
Other Employer Payroll Taxes
Although many employers are liable only for Social Security tax, Medicare tax, FUTA tax, and SUTA tax, others aren’t so lucky. Employers in California also must pay and report employment training tax—at 0.1 percent on the first $7,000 paid to each employee.
When in doubt, contact the state revenue agency to determine which state or local payroll taxes are relevant to your business, and be sure to check annual changes to various amounts listed here. For guidance on these and other payroll matters, contact us today.