Employers are required by law to withhold taxes from their employee’s paychecks, keep the funds secure and then report and deposit them with the IRS at the appropriate time. This helps the IRS by gathering the taxes of many individuals into a single purse for which a larger entity may be held responsible. Specifically, any employer who fails to collect, report and deposit its employee’s taxes is liable to criminal and civil sanctions.
Which taxes and how much to withhold
The specific taxes that employers must withhold and their respective percentages are summarized below.
- Federal income tax—the amount to be withheld is determined by the employee’s answers to a W-4 form. This form takes into account marital status, several dependents, other sources of income and planned deductions.
- Social security tax—6.2% of the employee’s gross income must be withheld and deposited to the IRS along with a matching amount paid by the employer.
- Medicare tax—1.45% of the employee’s gross income must be withheld and deposited to the IRS along with a matching amount paid by the employer. Additionally, if a particular employee earns above the current Medicare threshold, he or she must pay an extra .9%, though this extra percentage does not have to be matched by the employer.
- State income tax—if it exists in the employer’s state, the amount is determined by the state’s W-4 form.
- Local income tax—if it exists in the employer’s locality, the amount is determined by a flat or a progressive rate.
Though the withholding calculations are not difficult, an employer may wish to use reputable payroll software to streamline the process and ensure against any mistakes for which it may be liable. Some useful programs include Gusto, QuickBooks Payroll and Paychex Flex.
What to do with the withholdings
After collecting the withholdings, the employer should keep the funds in its business bank account or else send them to a payroll service for safekeeping. Obviously, at no point should these funds be spent! When it is time, and before the deadline, the employer should send these funds to the appropriate agency, along with the appropriate formal reports: form 941 or 944 for federal tax and form W-2 for state and local tax. Throughout the process, the employer should maintain documentation of everything related to its employees’ earnings and withholdings, including copies of the W-4, W-2 and 941 or 944 forms. This will help ensure that the employer is protected against any charges of mishandling, should any discrepancies arise down the road.