Small Business Owners Guide to Federal Payroll Taxes

The Basics of Federal Payroll Tax Regulations forFICA taxes are reported using I.R.S. form
Small Business Owners941-Employers Quarterly Federal Tax Return. This
According to the Internal Revenue Service, "smallform is filed quarterly and is designed to summarize all
business owners often have great responsibilities whileof the payments made throughout the quarter. The
operating and managing a business. Before youform is due at the end of the month following the
become an employer and hire employees, you need aquarter ending month (for example, first quarters
Federal Employer Identification Number.reports are due on Aril 30th).
If you have employees, you are responsible forFICA Summary
several federal, state, and local taxes. As an employer,• FICA = SS @ 6.2% + medicare @ 1.45% =
you must withhold certain taxes from your employees7.65%
pay checks. Employment taxes include Federal income• FICA is paid by both the employer and the
tax withholding, social security and medicare taxes asemployee. This is referred to as a matching tax.
well as federal unemployment taxes.• I.R.S. form 941-Employers Quarterly Federal
Federal Tax Identification NumberTax Return is used to file this tax.
Also known as an Employer Identification Number (EIN).• FICA taxes are paid on either a monthly or
It is used by the federal government (the IRS in thissemi-weekly basis.
case) to identify a business entity for the purpose ofFederal Withholding Tax
filing federal taxes.What is Federal Income Tax Withholding?
• Generally speaking, most businesses mustThe amount withheld from an employees paycheck
have an EIN #.each pay period.
• FEI # can be applied for by mail, or online,What is the Federal Income Tax Withholding rate?
by using an SS-4 form.The rate is determined by following a formula table
• You can file for an FEI # online atdesigned by the I.R.S. The formula takes into account
About the Electronic Federal Tax Payment Systemthe number of deductions and marital status on an
(EFTPS)employees W-4 form, as well as the amount of
According to the Internal Revenue Service, "EFTPS iswages an employee earns in a given pay period. The
a service provided free by the U.S. Department of theIRS provides a free withholding calculator here:
Treasury that enables businesses and individuals toWho pays Federal Income Tax?
make their federal tax payments electronically, 24Only the employee pays this tax. It is not matched by
hours a day, 7 days a week.the employer.
Based on the information you submit on yourHow is Federal Income Tax Withholding paid?
application (FEI# application) or if you indicate you willFederal Withholding Tax is paid at the same time FICA
have employees, you will automatically be enrolled intaxes are paid. The required deposit is the total
EFTPS so you can make all your deposits online or bycombined FICA and Federal Withholding Tax collected
phone. Within a few days you will receive instructionsfrom employees. See the section on FICA tax for
by mail for activating your EFTPS enrollment. You willmore information on how the deposits are made.
also receive an EFTPS Personal Identification NumberHow are Federal Income Tax Withholding taxes
(PIN) that you will use to make your payments, as wellreported?
as instructions for obtaining an Internet Password youAgain, Federal Withholding Taxes are reported
will need if you wish to make your payments online."together with FICA taxes. Both taxes are reported
FICA (Federal Insurance Contributions Act)simultaneously on the same I.R.S. form 941.
What is FICA?FUTA (Federal Unemployment Tax Act)
FICA is a federal tax paid to the I.R.S. FICA basicallyWhat is FUTA?
consists of two parts. The first part is social securityContributes to a fund that pays unemployment
taxes and the second part is medicare.compensation to workers who lose their jobs.
• Social security and Medicare taxes pay forWhat is the FUTA tax rate?
benefits that workers and families receive. SocialThe FUTA tax rate is .8% (or .008).
security tax pays for benefits under the old-age,Who pays FUTA tax?
survivors, and disability insurance part of FICA.Only employers pay this tax. Employees do not have
Medicare tax pays for benefits under the hospitalthis amount deducted from checks.
insurance part of FICA.How is FUTA tax paid?
What is the FICA tax rate?FUTA tax is paid annually to the I.R.S. and is due by
The social security tax rate is 6.2% and the medicareJanuary 31st.
rate is 1.45%, for a total FICA rate of 7.65%. The twoHow are FUTA taxes reported?
parts are normally lumped together and referred to asUsing a Form 940-Employer's Annual Federal
the FICA tax, though they are sometimes listedUnemployment Tax Return.
separately.Summary of Tax Reporting Forms
Who pays FICA taxes?941-Employers Quarterly Federal Tax Return-Used to
Both the employer and the employee pay FICA taxes.report FICA and Federal Withholding Tax payments.
The employer matches the 7.65% paid by theRemember that the actual payments are not sent in
employee, so that each party pays the same amountwith the form. Instead, the payments are made either
in FICA taxes. This is referred to as a matching tax.monthly or semi-monthly to the I.R.S.
How are FICA taxes paid?The 941 form is due by the last day of the month
FICA taxes are paid to the I.R.S. either monthly orfollowing the quarters end (for example, first quarters
semi-weekly, depending on how old the business isreports are due on Aril 30th).
and how large their tax burden is.Form 940-Employer's Annual Federal Unemployment
• Monthly tax depositors must deposit eachTax Return-Used to report FUTA tax to the I.R.S. at
month's taxes by the 15th day of the following monththe end of a calendar year. The payment and the
(for example, taxes from paydays during July arereport are filed together.
deposited by August 15).The 940 form is due by January 31st.
• Semi-weekly tax depositors makeOther Forms
payments as follows: For wages paid Saturday,(A link to these forms can be found at
Sunday, Monday, or Tuesday, deposit by the followingW-4 form-The form and its worksheet are used to
Friday. For wages paid Wednesday, Thursday, orcalculate and document the proper withholding from
Friday, deposit by the following Wednesday.each paycheck. A completed w-4 form must be
• New employers who have never filed aretained for each employee before they can receive a
form 941 before are automatically monthly taxpaycheck.
depositors for the first calendar year of the business.I9 Form-Used primarily for citizenship verification
Established businesses that pay less than $50,000 inpurposes. All U.S. employers are responsible for
annual FICA and Federal Withholding Tax (this tax willcompletion and retention of Form I-9 for each individual
be reviewed in the next section), are also monthly taxthey hire for employment in the United States. The
depositors.form must be available for inspection by the authorized
• Established businesses that pay more thanU.S. Government officials (i.e., ICE, Department of
$50,000 in annual FICA and Federal Withholding TaxesLabor). This form is not currently required to be files
will be defined as semi-weekly tax depositors.with any government agency, but it should be kept on
How are FICA taxes reported?site by employers.