Going through payroll tax reports and starting a business can be overwhelming, mainly if it is your first time doing so. One of the responsibilities of a business owner is withholding an employee’s compensation and paying contributions to Social Security and Medicare taxes as mandated in the Federal Insurance Contributions Act (FICA).
What is the FICA Tax?
FICA taxes mandate payroll tax on the employee’s paychecks, including contributions from the employer, to finance the Social Security and Medicare programs. This federal law requires employers to withhold three different taxes from the salary paid for the employees. FICA comprises these taxes:
- A 6.2% Social Security Tax
- 1.45% Regular Medicare Tax
- 0.9% Medicare Surtax for employees earning more than $200,000
In addition to withholding these taxes, employers must also pay a portion of the:
- 6.2% Social Security Tax
- 1.45% Regular Medicare Tax
FICA contributions are mandatory, and the rates are set annually. Usually, the payments vary depending on the income of the employee. In general, employees earning more, pay higher FICA taxes. Social Security contributions, on the other hand, have a maximum wage base wherein no contributions are necessary for any additional income. For 2019, the Social Security maximum wage base is $132,900. Medicare does not have a wage base limit.
Employers should know the different tax reports they must file to make sure that they are compliant with government regulations. Failure in filing reports may result in unnecessary penalties and fines. It is mandatory to acquaint yourself with the different types of payroll tax reports and their due dates.
Types of Payroll Tax Reports
IRS Forms 941(Employer’s Quarterly Federal Tax Return) and 944 (Employer’s Annual Federal Tax Return)
Form 941 is for reporting the federal income tax. This form also includes the Social Security and Medicare contributions the company withheld from the employee’s paychecks. The report must consist of the employer’s portion of the Social Security and Medicare contributions.
The form follows a calendar year, and filing must be every quarter. Note that the calendar year quarters end on the following dates: March 31, June 30, September 30, and December 31. Form 941 must be in not later than the last day of the month following the end of a quarter.
Some businesses with small payroll taxes or federal income taxes of less than $1,000 can file annual returns. For this, they can use Form 944. Form 944 is similar to Form 941, but it must be filed annually before January 31 to include the previous calendar year. There is no need to submit both forms.
IRS Form 940 (Employer’s Annual Federal Unemployment Tax Return)
The federal government also requires employers to make federal (FUTA) and a state unemployment tax contributions. Employers must pay taxes on the first $7,000 that is earned by each employee. Since your employees cannot contribute to unemployment tax liability, fees are not deductible from their wages. To report your company’s federal unemployment tax obligation, you must use Form 940. This annual return is due before January 31 to cover for the previous year. Note that if all deposits were done on time, you could file Form 940 until February 10.
Three tests can determine if you must pay FUTA tax. The three tests include a general test, household employees test, and farmworkers’ employees test. Under the general test, an employer must pay a FUTA tax on the wages paid to employees who are not considered household or agricultural employees. For this, you must file Form 940 if:
- You paid your employees with wages of $1,500 or more in any calendar quarter during 2017 or 2018
- You had more than one employee for parts of the day in any 20 or more different weeks in 2017 and 2018. Include all employees, whether they are full-time, part-time, or temporary. If the business is a partnership, the count should not include partners.
If the business is transferred or sold within the year and any one of the given conditions still applies, you must still file Form 940. However, you must not include any wages paid by the succeeding employee.
The FUTA tax rate is 6.0% and applies to the first $7,000 paid for each employee, which serves as the FUTA wage base. Paying wages subject to state unemployment tax may award employers of a 5.4% credit upon the filing of Form 940. Employers receive the maximum credit if they pay taxes in full and on time.
IRS Forms W-2 (Wage and Tax Statement) and W-3 (Transmittal of Wage and Tax Statement)
As an employer, you must prepare Form W-2 for each of your employees. This form will reflect the earnings of each employee, including deductions for Social Security and Medicare, special payments the employee earned, and the amount of state income tax withheld. Each employee must receive a copy of their W-2 for the past year not later than January 31. The Social Security Administration must receive copies by February 28 (April 1 if you file electronically).
Form W-3 is a transmittal form sent to the Social Security Administration to reflect total earnings, Social Security wages, Medicare wages, and tax withheld in the previous year. A separate W-3 must be present for each batch of W-2 forms sent. The due date is the same as the W-2 forms.
Aside from filing federal payroll tax reports, you must also submit the necessary returns within your state. Unlike the majority states, Nevada does not have a personal income tax. Small business owners with employees do not have to withhold state income tax on their wages. However, employers must still withhold federal income tax for employees.
Your employees must complete a federal form W-4. This form will ensure that you can withhold the correct federal income tax for your employees.
While Nevada does not have an income tax, they make up for it with a higher sales tax. The state has a general sales tax rate of 6.85% statewide, but it can vary by county as some levy local sales tax.