How to Calculate and Report your Employee Payroll Tax

Taxes are never simple, but for a business owner with paid employees, they can be utterly mystifying. Many new (and even experienced) entrepreneurs struggle with the complexities of workers‘ payroll taxes. Each state is different, and it would be impossible to cover all the variations on state payroll taxes here.

BUT federal payroll taxes apply to almost all U.S. based businesses, and they are generally due monthly, if more than $2,500, or quarterly if less than $2,500.

Calculating Employees’ Payroll Taxes

Payroll taxes cover

Federal Income Tax.
FICA (Social Security and Medicare).
Unemployment Tax (Both Federal and State)

IRS Publication 15A, Circular E (Employer’s Tax Guide) contains the instructions for figuring out how much to withhold from an employee’s paycheck and what additional amounts the employer will owe. However, this 68-page document is not a light read, and each employee’s taxes will have to be calculated separately, based on their income and the withholding declared on their W-4.

It is highly advisable to use a professional payroll service or payroll software to calculate this information. Remember, these are tax-deductible business expenses.

Reporting and Depositing Payroll Deductions

Payroll tax must be deposited electronically through the Electronic Federal Tax Payment System (www.eftps.gov). EFTPS is also where business owners can file the necessary forms for employees’ payroll taxes

Federal Tax Deposit Form.
Form 940 (or 940-EZ): Employer’s Annual Federal Unemployment Tax Return.
Form 941: Employer’s Quarterly Federal Tax Return; or Form 944: Employer’s Annual Federal Tax Return.

Depending on the number of employees in the business, payroll tax planning can quickly become a full-time job, and IRS fees for late filing can be severe. Again, it is wise to consider employing a payroll service to handle this process.

Maxine Taylor developed The Balance Sheet to be a flexible, all-encompassing financial service for business owners. Among other things, she and her team can help your business with payroll services and payroll tax planning. Contact The Balance Sheet for a consultation and see how we can make running your business easier.