Payroll Taxes and Employer Responsibilities

Employers calculate payroll taxes using an employee's gross or total wage earnings and various deductions to arrive at net or take-home pay. This seems simple enough on the surface, but calculating the deductions requires attention to detail and extreme accuracy.

The Basic Formula for Net Pay

In simplest terms, the basic formula for net pay works like this:

Employee's gross pay (pay rate x hours worked) minus statutory payroll tax deductions minus voluntary payroll deductions equals net pay

Statutory Payroll Tax Deductions

The law requires that payroll taxes must be withheld from an employee's paycheck each pay period. Employers must then transmit these withholdings to various tax agencies. Payroll tax deductions include the following:

• Federal income tax withholding based on the withholding tables in Publication 15
• Social Security tax withholding of 6.2% in 2021 and 2022, up to the annual maximum taxable earnings or wage base of $142,800 for 2021 and $147,000 for 2022
• Medicare tax withholding of 1.45%
• Additional Medicare tax withholding of 0.9% for employees earning over $200,000 for single taxpayers, $125,000 for married filing separate, and $250,000 for married filing jointly.
• State income tax withholding
• Various local tax withholdings, such as city, county, or school district taxes; state disability; or unemployment insurance

Voluntary Payroll Deductions

Voluntary payroll deductions are withheld from an employee's paycheck only if the employee has agreed to the deduction. Voluntary deductions pay for or contribute toward various benefits which the employee has elected to participate in. Voluntary deductions can include the following:

• Health insurance premiums, such as medical, dental, and eye care
• Life insurance premiums
• Retirement plan contributions, such as a 401(k) plan
• Employee stock purchase plans, such as ESPP and ESOP plans
• Meals, uniforms, union dues, and other job-related expenses

Voluntary deductions can be paid with pre-tax or after-tax dollars, depending on the type of benefit that's being paid for. Some pre-tax deductions reduce only wages subject to federal income tax, while other deductions reduce wages subject to Social Security and Medicare taxes, as well.

Employer Payroll Tax Responsibilities

The responsibility for payroll taxes continues even after paychecks have been issued to employees. The company is also responsible for:

• Paying the employer's share of payroll taxes
• Depositing tax dollars withheld from the employees' paychecks
• Preparing various reconciliation reports
• Accounting for the payroll expense through their financial reporting
• Filing payroll tax returns

Employer Payroll Taxes

Companies are responsible for paying their portion of payroll taxes. These taxes are an added expense over and above the expense of an employee's gross pay. The employer portion of payroll taxes includes the following:

• Social Security taxes of 6.2% in 2021 and 2022 up to the annual maximum employee earnings of $142,800 for 2021 and $147,000 for 2022
• Medicare taxes of 1.45% of wages
• Federal unemployment taxes (FUTA)
• State unemployment taxes (SUTA)

FICA Taxes

FICA stands for the Federal Insurance Contributions Act. The FICA tax consists of both Social Security and Medicare taxes. FICA taxes are paid both by the employee and the employer. Each party pays half of these taxes. Both halves of the FICA taxes add up to a total of 15.3%, broken down as follows:

• Social Security employee contribution: 6.2%
• Social Security employer contribution: 6.2%
• Medicare employee contribution: 1.45%
• Medicare employer contribution: 1.45%

The Additional Medicare Tax

Since 2013, an additional Medicare tax of 0.9% has been applied to unmarried employees who file an individual tax return and whose Medicare wages exceed $200,000. The additional Medicare tax applies to income over $250,000 for married taxpayers who file a joint return and to income over $125,000 for married couples who file separate returns.

Reporting Payroll Taxes

Employers are required to report their payroll tax obligations and to deposit payroll taxes in a timely manner. Reporting requirements include:

• Making federal tax deposits
• Employer's Annual Federal Unemployment Tax Return (Form 940)
• Employer's Quarterly Federal Tax Return (Form 941)
• Annual Return of Withheld Federal Income Tax (Form 945)
• Wage and Tax Statements (Forms W-2)

Employers also have requirements to file reports with various state and local agencies. Employers can find links to state tax agencies through the American Payroll Association website.