Payroll Tax Quick Guide [2023]

Business owners, especially those heading up startups, often fantasize about the bright future that awaits them after their companies expand in terms of both size and profitability, necessitating the hiring of additional staff. The thrill of becoming an entrepreneur comes from the opportunity to shape the company’s culture, boost revenues, and attract a customer base.

Managing payroll taxes is not particularly thrilling. In fact, many entrepreneurs find that figuring out payroll taxes and setting up a system to effectively manage those taxes is one of the trickiest aspects of staffing their first payroll.

What Payroll Taxes are?

Every time payroll is processed, payroll is deducted to cover various taxes and fees. Taxes can be levied at the federal, state, and even municipal levels. Withholding taxes are a type of payroll tax in which the employer sets aside a set amount of money from an employee’s paycheck to cover federal, state, and local income tax obligations.

The term “employer taxes” refers to those portions of payroll taxes that are solely the responsibility of the employer. Payroll taxes are paid in whole or in part by both the employer and the employee.

Notice how many times the term “employee” appears in the preceding definition. It’s not just another term for an employee; here, it’s a legal definition. As to what purpose does this serve? Employees’ payroll taxes must be paid by their employers. However, businesses have no obligation to handle contractors’ payroll taxes.

Payroll Tax Guide (Detailed Breakdown)

Let’s take a deeper dive into the different kinds of payroll taxes and how they function. The next paragraphs will provide you with a comprehensive understanding of payroll tax.

What is Federal Insurance Contribution Act (FICA) in Payroll tax?

Payroll taxes, known as FICA, are broken down into two sections: Social Security and Medicare.
This tax is shared equally by both employees and their companies.

An employee’s Social Security tax rate is 6.2% up to a certain threshold ($137,700 in 2020 and $142,800 in 2021). The 1.45% tax rate applies to the Medicare part. Employees will be responsible for 7.65% of their pay in FICA taxes, with the employer contributing an additional 6.25%.

Medicare taxes are unlimited whereas Social Security taxes have a cap. In reality, if an employee’s annual salary is beyond $200,000, he or she may be obliged to pay an additional 0.9% in Medicare tax, which the employer is not obligated to match.

Old-Age, Survivors, and Disability Insurance (OASDI) is the program financed by the Social Security payroll tax. It’s a safety net for people who need it, such as the disabled, the elderly, and their families.

The Hospital Insurance Trust Fund and the Supplemental Medical Insurance Trust Fund are funded by Medicare taxes. Medicare is a government health insurance program for anyone over the age of 65 and for those with disabilities. Hospitalization, nursing care, imaging, laboratory testing, ambulance transportation, and more are all included.

What is Federal Unemployment Tax Act (FUTA) in Payroll Tax?

Unemployment payments are available to workers who have been laid off without cause. The federal government does not directly fund unemployment insurance, but it does help states that are struggling to give benefits to their unemployed citizens.

The Federal Unemployment Tax Act (FUTA) provides for this aid. The first $7,000 of a worker’s salary is exempt from FUTA taxes. A FUTA tax rate of 6% is the norm. The net FUTA tax rate for most businesses can be as low as 0.6% thanks to a credit of 5.4%. You can claim this refund when you submit Form 940.

What is State of Maryland’s Unemployment Taxes (SUTA) for Payroll Tax?

The unemployment insurance tax levied in Maryland is a significant component in calculating the state tax rate for businesses in the state. Funding for Maryland’s unemployment insurance program comes from business contributions rather than employee premiums. Each company sets its own SUTA contribution rate.

Employers in Maryland who regularly pay their workers in the form of wages, salaries, commissions, or bonuses are subject to unemployment taxes. If a company pays its managers $100,000 per year in salary, for instance, that sum will be subject to unemployment taxes at both the state and federal levels.

The company is required to remit SUTA on all salaries owed to any employee for the calendar year, regardless of when those wages are actually paid out. Paychecks received in December or January after the start of the calendar year are included, as are any payments made before the start of the calendar year but not recorded as taxable earnings until after January 1.

It is crucial that you maintain track of all taxable wages earned in Maryland throughout any one-year period, as Maryland Unemployment Compensation taxes are based on the total amount of taxable wages paid in Maryland within a calendar year.

What is Income Tax Withholding in Payroll Tax?

The purpose of income tax withholding is to ensure that workers do not have to worry about any tax liabilities at the end of the year.
Instead of paying all of your taxes at once when filing, your employer will likely deduct a part of them every time you get paid and submit that sum to the government on your behalf. Depending on where the worker resides, this may include both federal and state income taxes.
Although mandatory by law, certain employees may elect to have a greater or lesser amount of their salary withheld for taxes.

What is Payroll Tax Payments and Reporting in Payroll Tax?

FICA taxes are often paid once a month or twice a month by businesses. Quarterly tax payments are the norm for FUTA.
Employers can make deposits using the Electronic Federal Tax Payment System for both scenarios.

A company must disclose the total amount of payroll taxes withheld during the year, in addition to making the required deposits. These reports are normally produced once every three months. However, firms with a low tax burden may be able to file these payroll taxes annually. The methods for submitting and depositing state and local taxes differ from one jurisdiction to the next.

What are Income Taxes for Independent Contractors in Payroll Tax?

Even though they aren’t officially processing payroll, sole proprietors, freelancers, contractors, enterprises functioning as partnerships, and other self-employed people are nonetheless required to pay payroll taxes.

Hypothetically, you are a sole proprietor who works as a freelancer. Self-employment tax is due if your annual net income is higher than $400. Your net self-employment income is subject to a 15.3 percent FICA tax since you must cover both the employer and employee portions.

Conclusion

Taxes deducted from employees’ paychecks go toward funding a variety of payroll services, such as Medicare, Medicaid, and public sector development. Also included are deductions for things like health payroll and vacation pay, as well as federal, state, and local income taxes.
Employers must pay 7.65% of employees’ salaries as federal payroll taxes, for a total of 15.3%. In addition to their income or earnings, you will also have to pay for things like workers’ compensation, benefits, and any taxes or fees that may be imposed by the state or municipality.

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