What Taxes Are Involved in Employee Payroll?

Aug 8, 2023

As the owner of a business, acquiring employees is a key indicator that your organization is growing. However, as many employers soon discover, understanding what is payroll and configuring payroll taxes can get complicated quickly. Ensure you’re in the know when it comes to payroll. You should understand how to do payroll, how are payroll taxes calculated, and how to anticipate how much are payroll taxes come time to pay them.

In this blog, we’re going to explore the question, “What does payroll mean?” We’ll also discover how you as an employer can anticipate the taxes involved in employee payroll. 

What is Payroll?

What does payroll mean from the lens of an employer? Mainly, payroll is the compensation businesses pay to their employees for working a set period. Keep in mind that payroll can differ from one pay period to another because of variables such as overtime and sick pay. Typically, human resources (HR) or a third-party accounting firm manages payroll tasks and potential pay variables. The payroll process can include tracking hours worked for employees, calculating pay, and distributing payments via direct deposit or check.

Payroll can also refer to the list of a company's employees and the amount of compensation due to each of them for a predetermined period of work. Payroll is a major expense for most businesses and is almost always deductible. The expense of payroll can be deducted from gross income, lowering a business’s taxable income.

Many companies outsource payroll services to accounting firms to streamline the hiring and employee management process. Employers track the number of hours each employee works and relay this information to their chosen payroll service or accountant. Come payday, the payroll service or accounting firm calculates the gross amount the employee is owed based on the number of hours or weeks worked and the pay rate. The service then deducts taxes and other withholdings from earnings and then pays the employees.

Are You Responsible for Payroll Taxes as an Employer?

How are payroll taxes calculated and are you responsible for them as an employer? Since your business and your employee are both taxpayers, there are two types of payroll taxes: ones that come out of your own pocket and ones that you collect from employee paychecks and remit to the federal government. You as an employer are responsible for managing both of these two types of payroll taxes, or you can outsource these tasks to a payroll service provider or accountant. 

How Are Payroll Taxes Calculated?

Part of understanding how to do payroll involves understanding how are payroll taxes calculated. Let’s cover how you can answer how much are payroll taxes based on the payroll taxes you pay out-of-pocket and the payroll taxes you retain from employees to remit to the federal government.

Out-of-Pocket Payroll Taxes:

  1. FICA tax: FICA is a mandatory payroll tax deduction used to pay for programs like Social Security and Medicare. This cost is shared by employer and employee. The employer portion is 6.2% for Social Security and 1.45% for Medicare, and you’ll collect and remit the same amount from your employees.
  2. FUTA tax: FUTA stands for Federal Unemployment Tax Act. It’s an employer-paid payroll tax that pays for state unemployment agencies. Contributions to unemployment insurance. The total amount is 6.0%. However, most states have a 5.4% credit, meaning most employers only pay 0.6%.

Remitted Payroll Taxes that You Collect From Employees:

  1. Federal, state, and local income taxes: As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities. To calculate how much of your employee’s federal income tax to withhold, you’ll need a copy of their Form W-4, as well as your employee’s gross pay.

How Much Are Payroll Taxes?

You can determine how much are payroll taxes using a few key calculations. Let’s begin by looking at federal, state, and local income taxes.

How to Do Payroll Taxes that You Collect From Employees:

When using the Wage Bracket Method, there are two possible calculations: one for employees with a Form W-4 from 2019 or earlier, the other for employees with a Form W-4 from 2020 or later. You can find Form W-4 from 2019 and its instructions using this IRS website link. For information regarding the Wage Bracket Method 2020, you can follow this link.

The Percentage Method tends to be more complicated and isn’t recommended if you’re doing this on your own. If you want to learn more about the Percentage Method, you can read all about it and the wage bracket methods in IRS Publication 15-T.

How Much Are Payroll Taxes that You Pay Out of Pocket:

Once you’ve figured out how much federal, state, and local income tax to withhold from your employees’ paychecks, your next step will be to figure out how much FICA to withhold (more on that below), and how much you’ll be required to pay on their behalf.

1. Calculating Federal Insurance Contributions Act (FICA)

When it comes to funding FICA, your employee pays 50% from their paycheck and the employer pays 50% out of their own revenue. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Combined, the FICA tax rate is 15.3% of the employee’s wages.

2. Calculating Federal Unemployment Tax Act (FUTA)

The FUTA tax rate is 6% on the first $7,000 of wages paid to employees in a calendar year. However, employers actually pay 0.6% since each state receives a credit to cover the remaining 5.4% of FUTA payments.

How to Make Payroll Tax Payments

Figuring out the answer to “What does payroll mean?” can be complicated, but making payroll tax payments is thankfully much simpler.

For federal income tax payments, just enroll in the Electronic Federal Tax Payment System (EFTPS), then make your payment online.

When it comes to state and local payroll tax payments, state and local payroll taxes are governed at the state and local levels. Payroll tax rates and rules vary depending on where your business is located. To find out more about payroll tax in your state and local area, check out the Federation of Tax Administrators’ list of each state’s taxing authority.

Federal, state, and local income taxes. As an employer, you withhold income tax on behalf of your employees and then remit those taxes quarterly to federal, state, and local tax authorities. To calculate how much of your employee’s federal income tax to withhold, you’ll need a copy of their Form W-4, as well as your employee’s gross pay.

4Corner Payroll Tax Services in Denver, CO

As a business owner, it can be hard to get a firm handle on how to do payroll. What does payroll mean in terms of the time you have to invest in taxes and calculations?

We know that payroll and taxes can get complicated quickly. That’s why 4Corner Business Service's team of experienced accounting and small business consulting experts provide you with the tools and financial information you need to make critical payroll decisions as the owner of a business in Denver, CO. 

Allow us to be the experts on payroll services and taxes so you can focus on growing your company. In addition to bookkeeping for small and large businesses, 4Corner offers support in choosing and using accounting software, professional tax services, and valuable financial advice to guide decision making. We help businesses both large and small implement proven growth strategies so you can turn our accounting and bookkeeping services into revenue successes. 

If you have any additional questions, feel free to contact us at 4Corner Business Services. You can set up a meeting with Phil Zavala, founder of 4Corner, to get you on the right track.


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