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Calculating the deductions from each employee’s monthly wages is not as straightforward as it might seem. It requires extreme accuracy and attention to detail to perform correctly. Unfortunately, the Internal Revenue Service (IRS) has little tolerance for mistakes and could penalize your company with significant fines for reporting incorrect information or failing to make timely payroll tax deposits.

IRS Expectations for Completion of Payroll Taxes

The IRS expects every company with employees to submit the employer’s share of payroll taxes as well as the deductions each employee is responsible for paying on a consistent basis. The mandatory taxes that employers must pay include 6.2 percent for social security, 1.45 percent for Medicare, federal unemployment taxes, and state unemployment taxes. After depositing employee withholdings and the employer’s own share of payroll taxes, the IRS requires the company to prepare a reconciliation report and explain each payroll expense.

Deductions Employers Must Withhold from Employee Paychecks

Every employee must pay federal income taxes based on his or her income and number of exemptions claimed on the W-9. Your small business must instruct every new employee to complete this form and then calculate federal tax withholding accordingly. Below are several other types of mandatory payroll taxes that your payroll department must deduct and submit to the appropriate agency.

2% Social Security tax up to a maximum salary of $132,900.

The salary cap amount is new for 2019, having increased from the base of $128,400 in 2018.

45% tax for Medicare funding.

You must add an additional .9 percent for married employees who file jointly and earn over $250,000, single and other filers who earn over $200,000, and married people filing individually earning over $125,000.

State income taxes based on information provided on the W-9.

Local tax withholdings if required by the municipality such as school district, city, county, unemployment insurance, and state disability insurance.  

Optional Payroll Deductions

It’s common for companies that offer employee benefits to pass along at least some of the cost to employees in the form of a payroll deduction. The most typical voluntary payroll deductions include those for health, dental, and life insurance. If you offer retirement savings plans such as a 401(k), whether or not you choose to match any portion of the employee’s contribution, this would come from his or her paycheck in the form of a deduction as well. You might also need to make one-time or recurring deductions for uniforms, training, or anything else the employee has a responsibility to pay.

Payroll Tax Reporting

In addition to making timely deposits, the IRS expects employers to prepare reports on all payroll tax obligations. These reports and forms include:

  • Form 940 or Form 940EZ, the federal annual unemployment tax return
  • Form 941, return for quarterly payroll taxes
  • Form 945, return for annual income tax withheld
  • Form W-2, annual wage and tax statement for employees  
Get Help with Your Payroll Taxes Today

Palmetto Payroll, located in Columbia, South Carolina, offers a complete range of payroll services for small businesses. This includes tax depositing, filing, and management reporting. As you can see, keeping track of obligations for payroll taxes requires a lot of work. When you outsource to us, it frees up your time to serve your customers and grow your business.

You wear enough hats already as a small business owner. Accountant doesn’t need to be one of them when you let Palmetto Payroll take over your payroll taxes.