If you are a business owner with employees, you are required to deposit and report employment taxes. The employment tax realm contains a myriad of withholding tax requirements and due dates. Also, you must prepare and file form W-2 (Wage and Tax Statement) for each paid employee. Those W-2s, along with form W-3 (Transmittal of Wage and Tax Statements) are then sent to the Social Security Administration. It is common for many employers to utilize payroll tax professionals (payroll companies) to handle the employment taxes on their behalf. However, it is crucial for all employers to understand the basics of employment taxes. Why you ask? Because ultimately the IRS holds you, the employer, and not the payroll company responsible for any mistakes. For purposes of this post, we will only discuss federal employment taxes.
What are Employment Taxes?
Employment taxes are amounts that are required to be withheld from employees’ wages and paid over to the federal government. An employer must withhold income, Social Security, and Medicare taxes on any wages paid. In addition, the business has to match the employee’s social security and Medicare withholdings. Once these amounts are withheld, they are required to be deposited (federal tax deposit) and reported to the IRS.
Federal Tax Deposits
As stated above, when the taxes are withheld, they must be deposited with the IRS. When you deposit the taxes, you are making a federal tax deposit. There are four (4) ways to make the federal tax deposits. You can use the IRS’s Electronic Federal Tax Payment System (EFTPS) to make deposits online or via phone. There is also the option of having your back set up ACH tax deposit payments on your behalf. By far the most popular option is to use a payroll company. Lastly, you can make federal tax deposits by same day bank wire. However, only utilize this option when you are in an extreme time crunch.
Naturally, the next question should be when are the deposits due? Well that depends on the size of your employment tax obligation. Most employers are on either a monthly or semi-weekly deposit schedule. If you are on a monthly deposit schedule, generally you must deposit the employment taxes by the 15th of every month. For example, the deposit for the payroll for August 2019 must be made by September 15th 2019. If the due date falls on a weekend, the date is extended to the following business day. For those employers on a semi-weekly schedule, federal tax deposits are due within 2-3 days after you make payroll. Beware, if deposits are not made on time, you may be subject to a penalty of up to 15% of the deposit.
Reporting Employment Taxes
The wages paid and taxes deposited are required to be reported to the IRS each quarter. Typically most employers are required to file form 941, Employer’s Quarterly Federal Tax Return. The return is due 30 days after the end of each quarter (ie. For the quarter ending March 31st , the return is due by April 30th ). However, if you made timely tax deposits, the due date is extended for 10 calendar days.
Employers are also required to report and pay Federal Unemployment Tax (FUTA) separately. Employees do not pay or have the FUTA Tax withheld from their pay. This tax is paid solely by the employer. FUTA tax deposits are due at the end of the quarter. The deposit must be made by the last day of the month that follows the end of the quarter. However, if your FUTA liability is $500 or less for the entire year, you have the option of paying the entire amount when you file form 940, Employer’s Annual Federal Unemployment Tax Return. Form 940 is due by January 31st of the following year.
If you are considering hiring employees, I urge you to immediately contact a tax professional. If you have any questions regarding payroll or the content of this post, please contact our office.