An Employer Guide to Payroll Tax Compliance

Published: November 17, 2022 by David Grethel

employer payroll tax review meeting

One of the more complicated aspects of running a business is knowing how to properly comply with local, state, and federal tax laws. When you open up a business, you’ll be responsible for paying payroll taxes consisting of several types, such as unemployment and FICA. With that said, payroll tax compliance is essential, as it ensures you’re abiding by government regulations and helps limit your risk of audit, penalties, and fees. To help you better understand employer payroll taxes, we’ve created this payroll tax guide for employers that covers everything from payroll regulations to the cost of non-compliance and more.

What Are Employer Payroll Taxes? Payroll Regulations

Employer payroll taxes is an umbrella term that refers to taxes on employees’ wages that help fund several state and federal public programs. Payroll taxes consist of the following taxes:

  • FICA Taxes: Established by the Federal Insurance Contribution Act, FICA taxes are deducted from employees’ wages to fund two programs: Social Security and Medicare. These two taxes are split evenly by both employers and employees. Social Security taxes help provide benefits to retirees, qualifying dependents, spouses, former spouses, and those with disabilities, while Medicare taxes provide health coverage to individuals 65 and older.
  • Income taxes: The amount of money deducted from an employee’s paycheck each period for income taxes is determined by their W-4 form, which outlines their tax liability. Income taxes are only paid by employees and go to the U.S. Department of Treasury, which uses them for a wide range of government initiatives.
  • FUTA Taxes: Established by the Federal Unemployment Tax Act, FUTA taxes are paid by employers to provide unemployment benefits to workers who have lost their jobs.

Over the years, several notable policy changes have helped shape payroll taxes and their intended use. For example, the Fair Labor Standards Act (FLSA) enforces minimum wage and child labor laws, while the Equal Pay Act ensures employee compensation is NOT discriminated against based on sex. Knowing the taxes your company is responsible for paying can help ensure you remain compliant. Working with a payroll service provider can help ensure you’re deducting and paying the right amount of payroll taxes.

Staying Payroll Tax Compliant

Now that you know what employer payroll taxes are, it’s time to understand how to remain payroll tax compliant. Continue using our employer’s payroll tax guide to learn more about the cost of non-compliance, payroll tax compliance basics, and common payroll tax compliance mistakes below.

Why Payroll Compliance Matters: Cost of Non-Compliance

Before diving into payroll tax compliance basics, it’s important to know what’s at risk if you fail to follow the rules and regulations surrounding payroll taxes. Some consequences an employer can face for non-compliance include:

  • Audits
  • Fines
  • Penalties
  • Interest
  • Owing back pay
  • Legal expenses
  • Employee distrust
  • Tarnished reputation

These are some of the many consequences a company can face for non-compliance with payroll tax laws. Working with a trusted payroll service provider can help ensure you meet all the necessary deadlines and make the correct payments.

Payroll Tax Compliance Basics

When it comes to employer payroll taxes, there are a few basics that can help you remain compliant. Some of these basics include:

  • Due dates: Federal and state payroll taxes must be paid by specific deadlines throughout the year. Making sure you meet these deadlines can help you avoid penalties and fees.
  • Withholding: It’s important to ensure you’re withholding the right amount of taxes, such as Social Security and Medicare taxes, from each employee’s paycheck.
  • Depositing: After withholding payroll taxes, it’s crucial to ensure they’re deposited to the right local, state, or federal agency.
  • Tax returns: For each federal and state jurisdiction in which your company operates, you must file the appropriate tax return.
  • Calculations: There are several important metrics to calculate payroll taxes, including overtime and wages.
  • FICA Taxes: FICA taxes come out to 15.3%, with employees paying 6.2% of their income to Social Security and 1.45% to Medicare, with employers matching both.
  • Federal income taxes: There are seven tax brackets that determine an employee’s tax liability, ranging from 10% to 37%. Employers must refer to an employee’s W-4 form to use their income to determine their tax bracket.
  • FUTA taxes: Unemployment taxes total 6% of the first $7,000 of an employee’s earnings and are paid by the employer. However, if an employer has to pay state unemployment taxes, they may qualify for a 5.4% credit, lowering their FUTA tax rate to 0.6%.
  • State taxes: Payroll taxes vary on a state-by-state basis, which means if you’re operating in multiple jurisdictions, calculating your payroll taxes can become increasingly complex. This is because some states may follow the federal government’s income tax code or create their own separate tax brackets and have different unemployment tax rates, minimum wages, and disability insurance costs.

Common Payroll Tax Compliance Mistakes

To avoid penalties and fines, it’s helpful to know common payroll tax compliance mistakes to better understand what to look out for. Some common mistakes include:

  • Misclassifying employees and independent contractors
  • Misclassifying exemptions
  • Failing to comply with the Equal Pay Act
  • Missing deadlines
  • Missing or incomplete information
  • Failing to report all forms of compensation

How to Stay Payroll Tax Compliant

Now that you understand the risks of non-compliance with employer payroll taxes, you may be wondering how to stay compliant. One of the best ways to stay compliant is by partnering with a payroll tax consulting partner.

As a business owner, you have countless responsibilities to focus on. Calculating and filing payroll taxes can take away from other areas of your business, while relying solely on your payroll vendor isn’t enough. With Experian Employer Services, you can use our payroll tax solution to keep your data secure, ensure compliance and more. Schedule your demo today to streamline your payroll tax process.

Related Posts

Get an overview of the latest updates made to 2022 Form 941 for the second quarter and make sure to comply with the necessary changes.

Published: August 12, 2022 by Stephanie Tennison

Follow Us!

Subscribe to our blog

Enter your name and email for the latest updates.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

About Us

We brought together the best of the best to deliver a suite of specialized solutions with unmatched service, trusted expertise and client-inspired innovation. We’re focused on the employee experience while improving your bottom line. Reduce complexity and minimize disruption with Experian Employer Services.

We’re keeping the focus and flexibility you value in boutique providers and adding the resources and security of Experian.