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Payroll Basics for Small Businesses

Payroll Taxes

Basics of Payroll Taxes. What Every Small Business Owner Should Know.

October 23rd, 2015

Taxes of all types have probably been around since the start of human society. Income tax was not permanent in the US until 1913, Social Security tax starts in 1937, Federal Unemployment Insurance Tax (FUTA) in 1939 and Medicare program was established in 1965. These taxes and various other State taxes together become business payroll taxes and it is the responsibility of employers to process and manage employee payroll and payroll taxes.

There is an interconnected, self-checking relationship of payroll information among the government, the employees and the organizations.

Payroll Basics

Businesses calculate payroll tax withholdings, issue paychecks and a year-end W-2 to employees. Businesses also report payroll records to the government with form 941, 940, W-2, etc. Employees then file and pay personal, 1040 income tax based on W-2 information at the end of the year. The government collects and reconciles all employee payroll and individual tax return records to enforce the tax laws.

The purpose of company payroll taxes is to fund the government operations and provide society security, medical and unemployment insurances for a better society. Payroll is not difficult. It is probably very hard to find a University that offers a semester worth of class on payroll taxes. On the other hand, the requirements to collect funds, deposit taxes and file payroll reports at regular, frequent intervals is what complicates the process. In addition, every business, large and small, has to manage employee payroll. Therefore, large and small business payroll service companies have evolved over time to help calculate, manage and file employee payroll taxes.

Use California as an example, the types of business payroll taxes and the associated employee payroll returns are listed in the tables below.

Federal Employee Employer Payroll report
Income tax Yes No Form 941
Social Security Yes Match Form 941
Medicare Yes Match Form 941
Unemployment Insurance No Yes Form 940
State, California
Income tax Yes No Form DE9C
Unemployment Insurance (UI) No Yes Form DE9
Employee Training (ETT) No Yes Form DE9
State Disability Insurance (SDI) Yes No Form DE9

Different States or local governments may impose additional payroll taxes and you need to check with the State. Essentially an employer acts as an agent for the government to collect, deposit payroll taxes and file payroll reports.

In summary, every organization, with even just one employee, needs to manage the 3-tasks of payroll taxes:

  • Calculate & withhold taxes from each employee paycheck – The employer needs to know its current State UI (Unemployment Insurance) rate. Other employee payroll taxes are the same for all organizations and are handled by the employee paycheck calculator or the payroll service provider.
  • Deposit employee payroll taxes on time – most small businesses are “monthly depositor”, meaning the company needs to deposit the payroll taxes collected in the prior month to the IRS by the 15th of the following month. Deposit schedule is defined by the IRS based on the amount of taxes. It is not how often, pay-cycle, the employee is paid.
  • File payroll reports on time – The IRS requires quarterly report of form 941 and annual form 940. W-2s are reported to the SSA and each State typically has 941 and 940 equivalent forms for payroll tax reporting.

Paycheck Manager can help you with your employee payroll taxes.

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