Payroll Tax Compliance: Employer payroll tax compliance issues – know the basics         

As an employer, there are many rules and regulations that require your attention. First and foremost, be sure you understand whether or not you are in an employer/employee relationship. Ask for professional help before you make this decision on your own. Employers are subject to both Federal and State legislation – there are a lot of pitfalls for the unwary.   Once you understand your situation, be sure you are complying with all the payroll tax requirements.

Employers must withhold certain amounts from employee pay (sometimes called wages or compensation). There are many types of withholdings, but the two most well-known are Income taxes and FICA (The Federal Insurance Contribution Act). There is often confusion as to the true nature of these amounts so the following is a brief discussion of each.

Income tax withholding can be for Federal, State , City or Local . You, as the employer, are collecting on behalf of a governmental entity. It becomes your responsibility to collect these amounts and to remit them in a timely manner to the proper agency. For Florida based businesses, state, city, and local tax withholdings do not apply.

FICA is made up of two parts. You will often hear that FICA is 7.65% for employee and employer. Unfortunately, it is not quite that simple. The combined rate for employers and employees is composed of 6.2% Social Security and 1.45% for Medicare Tax. However, Social Security applies only to the first $106,800 of wages, while Medicare tax is applicable to all wages paid. The employer matches the amount withheld from the employee. For example,  assume an employee has $100 in wages, $7.65 is withheld from the employee and another $7.65 is paid by the employer. In total the amount remitted by the employer is $15.30 for FICA on this amount of wages.

Federal payroll tax deposits are generally made using the EFTPS (Electronic Filing Tax Payment System). See EFTPS.gov for more information about using this system.

File for and report Federal Income Tax Withholding and FICA taxes on Form 941 – Employer’s Quarterly Federal Tax Return. Deadline for filling: on or before last day of the month after the quarter involved. Significant penalties can be assessed for failure to remit required payroll tax deposits as well as for late filing of the required returns.

Also, by the last day of February, the Social Security Administration expects you to file Forms W-2 and associated Form W-3 for the previous year. For more information, visit Social Security Online.

The Federal Unemployment Tax Act (FUTA) is another law that imposes payroll taxes on employers. You are subject to these taxes if you:

• Employ one person or more in “covered” employment.
• Are an employer as outlined by FUTA, i.e. you employed someone for at least one day in each of the 20 weeks during the current or previous calendar year or paid at least $1,500 in wages in a calendar quarter during the current or previous calendar year.

Only the employer pays the FUTA tax; this tax is not withheld from the employees’ wages. The 2010 FUTA tax is paid on Form 940. The tax applies to the first $7,000 you pay to each employee. If State unemployment taxes have been paid timely, the effective rate of FUTA is .8% on the first $7,000 of wages.

It is imperative that you visit your state website to understand your State Unemployment Tax Rate and to determine what your current rate is and what the taxable wage base is for your state.

If you are an employer don’t stop here, make sure you understand the rules about the following and how/when they might apply to you:

• Minimum Wage
• COBRA
• Exempt versus Non-exempt employees
• OSHA
• Fringe Benefits
• Department of Labor
• Discrimination