"Payroll tax" is a blanket term used to address the combination of social security, Medicare, unemployment insurance, and state and federal income taxes withheld by an employer from an employee's wages. In addition to withholding these taxes at the time of payment of wages, employers are also required to pay most of the taxes on their own behalves, deposit the taxes with appropriate government depositories, report withholding activities to the government, and keep appropriate records.

The Federal Insurance Contributions Act requires employers to both withhold and pay the social security and Medicare taxes. Tax collected to finance the Federal old-age survivors and disability insurance (OASDI) program is commonly referred to as "social security." Tax collected to finance hospital and hospital service insurance for those 65 years or older is commonly referred to as "Medicare." Each of these is withheld from employees' wages and matched by the employer at their respective fixed rates. Although social security tax is subject to an annual withholding limit (the taxable wage base), there is no limit on withholding for the Medicare tax.

The Federal Unemployment Tax Act imposes the unemployment insurance tax to finance a joint federal/state program providing benefits to temporarily laid-off employees. While the federal government collects the tax under federal law, every state also has laws requiring employers to make unemployment insurance contributions. This tax is not withheld from employees' wages, but is only paid, deposited, and reported by employers.

Employer Responsibilities

Federal income tax is a "pay-as-you-go" tax, meaning that it must be paid periodically throughout the year, rather than all at once at the end of the year. Employers make these periodic payments for their employees in the form of payroll deductions based on information employees disclose; such as filing status, number of dependents, and number of exemptions. Self-employed individuals must make quarterly estimated income tax payments. State withholding laws usually apply to both employees and self-employed individuals, requiring withholding for state tax if employers or the self-employed withhold federal income tax.

There are multiple methods of determining whether an employer is responsible for withholding or paying a specific type of payroll tax. For example, federal income tax withholding duties generally fall upon any person for whom an individual has performed services as an employee, where a "person" can mean an individual, organization, or government. The employer who meets this definition also must withhold and pay social security and Medicare taxes. Alternatively, employers must pay unemployment insurance tax if they paid wages of $1,500 or more during the calendar quarter or had at least one individual as an employee for part of any day in each of 20 different calendar weeks.

Is your business withholding and paying the correct amount of payroll tax for your employees? While these duties may seem simple at first, they can quickly grow complex. For example, if your company directs individuals to perform certain duties, yet has no control over how they are paid for the services they perform, then you may not be considered an employer for some aspects of the payroll tax, but may still be required to withhold or make payments for others. Another instance involves the exception for independent contractors. While no withholding or payroll tax payments are required for independent contractors, determining the individual's status as an employee versus independent contractor may prove difficult.

If you are unsure of your company's responsibilities for withholding or paying payroll tax for service providers, please feel free to give this office a call and we can provide some analysis of this issue.