What is Payroll Tax Withholding and How Does it Work?

Accountant Calculating Payroll Tax Withholding
As an employer, you are obliged to pay your employees. As a responsible employer, you also must withhold tax deduction. Following IRS laws and regulations, Social Security Administration (SSA), and state, pulling out some cash for payroll taxes is required.  Being an employer or an employee first, you must know the fundamentals of Payroll Tax Withholding.

What is Payroll Tax Withholding?

Payroll tax withholding is when an employer withholds a share of an employee's gross wages for taxes. It is mandatory to withhold Payroll when you have employees . The withheld amount is based on the employee's salary. Forward the withheld payroll taxes to the relevant agencies such as IRS. 

You have two ways to withhold taxes from employee wages: 1. Cutting taxes from the salary manually. 2. Using payroll tax withholding software . Withholding every month helps an employee, which they may need in total while filing their annual tax return. 

The employee gets a tax refund if the total amount withheld for the year exceeds what the employee indebted.

It would be best if you withheld the following for the employee share of payroll taxes: 

  • Social Security tax
  • Medicare tax
  • Federal income tax
  • State income tax
  • Local income tax
  • State-specific taxes

Federal Income tax withholding requirement varies based on the employee's marital status, dependents, and Form W-4 adjustments. 

Here you must know Social Security and Medicare taxes are known as FICA tax. In contrary to federal income tax, FICA tax is a fixed rate of an employee's earnings. Moreover, FICA is an employee and employer tax, meaning employers must contribute the same sum they withhold from their employees' wages. 

Some of the employees may be Federal income tax-exempt. But the tax exemption on Form W-4 does not apply to Medicare or Social Security taxes.

Withholding payroll taxes

As an employer, it is your job to withhold taxes from employee wages.

Here's a listing of responsibilities relating to payroll tax withholding: 

 1.Calculate the tax

Manually calculating payroll taxes can be time-consuming and significantly leave room for errors if their salaries and hours vary. To help calculate the tax, consider using payroll software.

 2.Withhold the tax

After calculating the payroll tax, withhold the payroll taxes to remit to the agencies by the due dates. 

 3.Report the withheld tax

Report the reserved tax to the IRS, SSA, your state and/or locality (if applicable), and employees. 

Following are the documents you report payroll tax withholding on:

  • Form 941 or 944 (IRS)
  • Form W-2 (employee, SSA, state, and locality)

 4.Remit the tax to agencies

Deposit withheld payroll taxes to the:

  • IRS
  • State
  • Locality

 5.Record everything 

The most important for payroll withholdings is to keep employee-related records such as:

  • Wage Rate
  • Working Hours
  • Gross Income
  • Withholding Taxes
  • Net Income

Also, make photocopies of the following forms for your records, and keep them in a protected place:

  • W-4
  • W-2
  • 941 or 944
  • State-specific 
  • Local-specific

The Takeaway

You are required to remit withholding taxes on time to avoid penalties by the agencies. So it is better throughout the year, you consult your state and district to know how to report withheld payroll taxes. If it is all very confusing, how much to withhold from an employee's paycheck and when to report? Consider hiring a CPA to do all the calculations for you. You can also use payroll software to calculate taxes and set the records straight. 

Thousands of contractors throughout the country rely on Certified Payroll Reporting to simplify their prevailing wage reporting, join them today by clicking here to contact us .

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