Taxes are a fact of life for businesses of all sizes, and paying taxes is a crucial element of payroll management. Payroll taxes are a group of taxes used by governments to fund Medicare, Social Security benefits, and unemployment. State and local governments may also collect payroll taxes to maintain and improve local infrastructure and services, including parks, road maintenance, and first responders. Some payroll taxes are paid by employers, and some are paid by employees.
Taxes Paid by Employees and by Employers
Payroll taxes are mandatory payroll contributions that are made by both employees and employers. Employees pay federal income tax, state income tax, and local income tax.
These payroll taxes are paid on an equivalent shared basis by both employers and employees: the Social Security tax and the Medicare tax.
These payroll taxes are paid by employers only: the federal unemployment tax and the state unemployment tax (except for a few states).
The payment responsibility for other state and local-specific taxes varies.
Employers pay 6.2% of each employee’s wage for Social Security tax, and employees pay a matching 6.2%, up to a withholding threshold. The Medicare tax is paid by both employers and employees at a matching rate of 1.45% of each employee’s wages. The rate for taxes paid by employers only for federal unemployment depends on each state, as does the tax rate for state unemployment taxes.
Managing payroll gets more complicated with employees’ voluntary deductions, which can include health insurance premiums, life insurance premiums, retirement plan contributions, employee stock investments, uniform dues, uniforms, meals, or additional expense deductions.
What Happens if an Employer Doesn’t Pay Payroll Taxes?
It is imperative that payroll taxes are paid by employers accurately and on time. Failing to do so can lead to serious consequences. The IRS imposes penalties for late or insufficient tax payments. The IRS can assess a Trust Fund Recovery Penalty (TFRP) for willful failure to collect and remit employment taxes.
If taxes are not properly withheld, employees face tax liabilities when filing their annual tax returns. This can cause difficult workforce relationships and may lead to employee lawsuits against their employers.
States have their own withholding laws and penalties for non-compliance. Willful failure to withhold taxes can escalate into criminal charges. Employers who fail to comply with withholding requirements may lose eligibility for some tax credits or deductions.
Payroll Mistakes to Avoid
Professional payroll services can ensure that payroll taxes are paid by employers correctly by avoiding these common payroll mistakes:
- Employee misclassification
- Inaccurate time tracking
- Overtime errors
- Missing payroll deadlines
- Neglecting employee benefits
- Not keeping detailed records
- Overlooking state and local taxes
- Failing to address garnishments
- Ignoring tax reporting.
The Benefits of Using a Professional Payroll Service
Using a professional payroll service will help ensure that payroll taxes are paid by employers with these benefits:
- Time and resource savings
- Reduced errors and the risks of penalties and legal issues
- Enhanced compliance
- Access to specialized knowledge and expertise in payroll and tax matters
- Cost savings
- Streamlined processes
Choose an Expert Payroll Service
Choose an expert payroll service, Palmetto Payroll, to assist you with your payroll system. We have offices in Columbia and Charleston, serving over 300 business owners statewide, and we offer tailored solutions to save you time and money so you can thrive and grow, including payroll, tax depositing and filing, management reporting, Human Resource Services, and timekeeping services.
