Payroll Taxes, Part I – Income Tax & Social Security

Nothing will get you in IRS trouble faster than incorrect, late or missing payroll tax returns and/or deposits. Many a business has gone merrily along for 3 to 5 years thinking everything was fine and then WHAM! The IRS hits them with errors, underpayments, missing returns and, before they can say “Oops”, they are deep in debt and close to losing their business.

Employee Deductions and Form 941

According to the State Controller’s office in Austin the vast majority (estimated at 60% to 65%) of the 16,600 businesses in El Paso are individually-owned and operated. Tax information for these small businesses is not easy for them to get both because many don’t know where to look and because the people who do have it charge dearly for the information.

Employer Identification Number Required:

Each employer must have an Employer Identification Number or EIN. This number is assigned by the Internal Revenue Service by filing Form SS-4. This number is used on all employer tax forms.

Informational Booklets and Forms:

Once the EIN is assigned, the IRS will provide the employer with Circular E, Employer’s Tax Guide and other instructional materials detailing the employers responsibility for withholding and remittance of Federal Taxes. Additionally, they send the appropriate Form 941, Employer’s Quarterly Federal Tax Return, to the employer a month prior to the due date with additional information and instructions. There will also be instruction for using the EFTPS (Electronic Filing and Tax Payment Services) website for making your payments.

Deductions required:

Each employer must deduct from each paycheck of each employee, an amount for Federal Withholding which includes Income Tax based on the wage rate and total employee exemptions. Form W-4 which must be completed by each employee will provide the appropriate information necessary to determine this amount.

Also to be deducted is an amount from each employee for FICA and FICA MED which are the Social Security and Medicare amounts. These percentages are currently 6.2% (.062) and 1.45% (.0145) respectively.

Employer Matching:

Additionally, each employer must match the deductions for FICA and FICA MED. This brings the total amount dut to the Governmenr for FICA to 12.4% (.124) and for FICA MED to 2.9% (.029).

Remittance (Form Screen):

Required remittance depends upon the amount of tax due in a single period. If the taxes are $500 or more in a single quarter (3-months), the employer must deposit the deductions and matching amounts using the EFTPS website for making monthly deposits.

For those whose taxes are less than $500 in a quarter, they may remit the total amount due with the Form 941 which is filed once per quarter.

Form 941 contains information on:

IS LOGO  the number of employees (line 1)
IS LOGO  total compensation paid (line 2)
IS LOGO  income tax withheld (line 3)
IS LOGO  total social security (line 6)
IS LOGO  total medicare (line 7)
IS LOGO  total tax due (line 11)
IS LOGO  deposits made (line 14)
IS LOGO  balance due, if any (line 15)