Making Sense of Employee Taxes

Understanding employee taxes can be one of the most difficult aspects of running a business and hiring employees. But if you don’t realize all of the complexities of employee payroll tax, it can get you and your business into a heap of trouble.

FICA and Federal and State Unemployment

First, you need to understand the employee taxes you are responsible for paying as an employer.The first is often referred to as FICA, and it includes Medicare and Social Security taxes. FICA provides funding for welfare benefits for senior citizens. Employers pay half of FICA taxes and withholdings for employees, while the remaining half is withheld from employees’ paychecks.

The second tax employers are required to pay is the federal unemployment tax. This tax funds state unemployment benefits and the associated administrative costs. It is important to know that employers must pay federal unemployment tax on the first $7,000 earned by each employee during a calendar year.

Employers must also pay state unemployment tax. This tax is based on the location and size of a business, as well as its number of employees. Because each state operates its own unemployment program, state unemployment tax rates tend to vary ― so it’s best to check with your state unemployment division for specific details.

Withholding Employee Taxes

In addition to the taxes you must pay as an employer, you are also responsible for withholding the employee’s portion of his or her taxes. Pay close attention to the employee tax form, or W-4, completed by the employee which states exactly how much money you need to deduct from his or her paycheck. Usually the withholding amount will depend on the number of allowances claimed, marital status and any exemptions the employee might claim.

It is very important that you stay on top of your employee’s tax forms because they have the right to change them by submitting a new W-4. If an employee submits a new form — thereby changing the amount of their withholding — and you fail to deduct the correct amount of money, you could be subject to IRS penalties.

Make Your Deposit

You will need to deposit both the taxes that you are responsible for paying and the employee tax withholdings in an authorized depository for federal taxes. You can do this by either mailing or delivering your check or money order. These taxes are due either semi-weekly or monthly; your employee-tax-withholding due dates will be determined by the size of your payroll. Usually, if your payroll is less than $2,500 every three months, you can file quarterly. If your employee taxes are larger, you’ll need to file more often.

As most employers know, employee taxes can be a headache. Unfortunately, the employee payroll tax problem is a headache that simply must be endured. But with a little understanding and careful attention to detail, the hassle of filing employee tax withholdings can be a little less of a bother.

Matt Bacak, the Powerful Promoter and Entrepreneur Magazine e-Biz radio-show host, became a "No. 1 Best-Selling Author" in just a few short hours. He has helped a number of clients target his specialty: opt-in e-mail direct marketing systems. For more information, visit Bacak's Web site at www.powerfulpromoter.com, or sign up for his Powerful Promoting Tips at www.promotingtips.com.

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