What Is Payroll Tax?

As a business leader, you’ve got a ton of responsibilities on your plate. On top of all the day-to-day work of running the company, you also have to make sure that your payroll taxes are in order. But what is payroll tax? More importantly, how do you keep track of these taxes and avoid any run-ins with the IRS?

Payroll taxes are a significant aspect of running any business. You must keep them in order to stay compliant and avoid major headaches down the road. The good news is that, with the right knowledge and tools, staying on top of payroll taxes doesn’t have to be a burden.

Did you know there’s software that can help you ensure more accurate timesheets for payroll? Try When I Work for free to streamline your payrolling processes with time tracking and integrations.

Key takeaways:

• Payroll taxes fund critical services like Social Security and Medicare
• Both employers and employees share responsibility for certain payroll taxes
• Small and large businesses have different tax obligations
• Understanding the different types of payroll taxes can help you manage them efficiently

Table of contents: 

• What is payroll tax?
• Types of payroll taxes
• How to keep track of payroll taxes
• How When I Work can help

What is payroll tax?

Payroll tax is money you have to withdraw from employees’ wages to then pay to the government. These funds are allocated to programs like Social Security and Medicare. Payroll taxes ensure that employees contribute to these services during their working years. They will be able to use these funds later in life.

You are responsible for withholding payroll taxes from your employees’ paychecks and contributing your share. The government relies on businesses to collect these taxes on their behalf. Tax rates and rules can vary depending on your business size and location. However, just about every company with employees has to follow federal payroll tax laws. 

Do all businesses have payroll taxes?

Yes, almost all businesses with employees have to take care of payroll taxes. The specific requirements for this process can differ based on your business. Small companies may have fewer obligations than larger corporations. Your state or local jurisdiction may also charge separate payroll taxes.

What are the wage limits for payroll tax? 

Social Security tax has a wage base limit. The IRS adjusts the limit each year. In 2024, working individuals will have to pay Social Security tax on earnings up to $168,600. There are no wage limits for Medicare taxes, meaning all covered earnings are subject to Medicare tax. 

Types of payroll taxes

Here’s a look at the main types of payroll taxes you’ll have to account for:

Federal Insurance Contributions Act (FICA)

FICA funds Social Security and Medicare programs. Both employers and employees share this tax burden. Your business has to withhold FICA taxes from employee paychecks and match the amount with your own contribution. 

You and each employee will contribute a percentage of the employee’s wages up to the wage cap. There is no wage cap for Medicare taxes, meaning you and each worker will contribute a set percentage of all earnings. 

Self-Employed Contributions Act (SECA)

You are required to pay both the employer’s and employee’s share of Medicare and Social Security taxes if you are self-employed. This is known as the Self-Employed Contributions Act (SECA) tax. You may be able to deduct the employer-equivalent portion of SECA taxes when filing your federal return. 

Federal income tax

Federal income tax is the amount withheld from employees’ wages based on their earnings and tax bracket. You must calculate the appreciated amount to withhold, which varies based on an employee’s W-4 form. Employees are responsible for indicating their filing status and number of dependents. A mistake on the W-4 form could lead to too much or too little withholding. 

State income tax

States that charge an income tax require you to withhold this money from employee’s wages. Tax rates and requirements vary by state. Some states, like Florida and Texas, do not impose a state income tax. Other jurisdictions have progressive brackets that charge people based on their annual income. 

How to keep track of payroll taxes

Managing payroll taxes can be tricky. The task becomes especially difficult if you’ve got to keep up with state and federal deadlines. You’ll have to jump through some extra hoops if your workforce consists of full-time, part-time, and contract workers. 

The good news is that you can make payroll taxes much easier by staying organized and being proactive. Here are a few other tips to help you avoid fines and simplify tax management: 

Know the important dates and deadlines

One of the most important steps in managing payroll taxes is knowing when payments and filings are due. Your business will probably have to submit payroll taxes on a monthly or quarterly basis. While some companies are allowed to file annually, we don’t recommend this approach. 

A lot can go wrong in the course of a year. The quarterly approach gives you a chance to look over your payroll taxes and identify any discrepancies. If you wait until the end of the year, a relatively small problem can compound into a huge mishap. Suppose that you are withholding too little payroll tax from a few of your employees. Fixing three months worth of withholding errors is a lot easier than repaying a year’s worth of taxes. 

Figure out when and how often your taxes are due (i.e., quarterly or monthly) and stick to the set deadlines. Missing a deadline can result in hefty fines and interest. Make sure you’re aware of all the important dates on the calendar. 

Learn which forms your employees need

Accurate record-keeping starts with knowing which forms your employees need. Most workers will need to complete a W-4 form. This form is for federal income tax withholding. Among other things, the form will include the employee’s:

• Social Security number
• Filing status (i.e., married or single)
• Number of dependents 
• Name and date of birth

Contract workers will need to complete a W-9 form. Your business will maintain the form and notify the IRS of the contractor’s annual earnings. You won’t be responsible for withholding taxes. That burden falls on the contractor. 

You’ll also have to distribute tax forms to employees at the end of the year. Full- and part-time employees will receive a W-2. Contractors will receive a 1099-NEC. You are legally required to give these forms to members of your workforce, so make sure you do so in a timely manner. 

Keep your records

The IRS requires you to keep records of employment tax withholdings for four years. You should have the forms ready for review in case the IRS audits you. The records should include copies of:

• W-2 forms
• Tax returns
• W-4 forms
• Any documentation of tax payments

Even if you think you are doing everything right, make sure you have these records readily available. If the IRS initiates an audit, you want to give them the documents they need to resolve the issue fast. Failing to produce the documents could drag out the audit or, worse, lead to hefty fines. 

How When I Work can help

Accurate payroll taxes start with accurate timesheets. When I Work employee scheduling software includes a time clock that helps you keep an accurate accounting of each person’s hours worked. Plus, you can use an integration to your favorite payroll provider to help you save time and reduce errors when you run payroll.Sign up for a free trial of When I Work today!