Overview: The most important payroll process for all employers is undoubtedly withholding for federal, state and local income and employment taxes and timely remitting the amounts collected to the appropriate government agencies. In turn, proper withholding leads to correct employee paychecks, and timely remitting of withheld taxes avoids serious employer penalties.
The income and employment tax withholding process requires an employer to understand: the importance of obtaining and correctly recording employee Social Security Numbers; how to determine the amount of federal income and Social Security and Medicare (FICA) tax to withhold; the various federal income tax withholding and payment methods; federal recordkeeping requirements; and the penalties that are imposed for noncompliance.
Trends: The following important information affects withholding in 2014!
Additional Medicare Tax Rate. An additional 0.9 percent Medicare tax (AMT) rate applies to single employees who earn more than $200,000 and to married couples who file joint tax returns and earn more than $250,000. For high earners, the total Medicare tax rate is 2.35 percent. For all other employees, the rate is 1.45 percent. The AMT took effect January 1, 2013 under the Patient Protection and Affordable Care Act (PPACA).
Final IRS Regulations. The Internal Revenue Service has issued final regulations under § 3504 of the Internal Revenue Code describing circumstances that will help determine which party is liable for an employer's employment taxes when an employer has entered into a service agreement with a third-party payor. Obligations often covered in such agreements may include withholding employment taxes from employees' pay, making wage payments to employees, and timely reporting and remitting the employer's employment taxes to the appropriate government agencies.
Author: Rena Pirsos, JD, Legal Editor
Employers must withhold federal income taxes from employees' pay every pay period. Employers that use automated payroll systems may find that the annualized wages method of withholding is more accurate than other withholding methods. This How To guides employers on using the annualized wages method of withholding.
Employers must withhold federal income taxes from employees' pay every pay period. Certain employees, such as commission salespeople, may be overwithheld if their employers use the regular percentage method tables, without adjustment for the seasonal nature of employees' jobs. This How To guides employers on determining withholding using the cumulative wages method.
Employers must withhold federal income taxes from employees' pay every pay period. The IRS has developed several methods employers can use to fulfill this duty. This How To shows employers how to withhold using the percentage method withholding tables published by the IRS.
Employers must withhold federal income taxes from employees' pay every pay period. Certain employees, such as employees who start work in the middle of the year or who work for only a short time during the year (e.g., college students working during the summer), may be overwithheld if their employers use the regular percentage method tables, without adjustment for the part-year nature of their jobs. This How To guides employers on determining withholding using the part-year employment method.
Employees often receive supplemental wages, which are taxable and subject to income tax withholding, FICA, and FUTA. For employees who receive up to $1 million a year in supplemental wages, employers have several different withholding methods from which to choose. This How To shows employers how to withhold on supplemental wages under the aggregate method.
Ensuring that the proper amount of income taxes is withheld from employees' pay may be difficult for employers that have employees whose pay varies pay period to pay period (e.g., employees receive overtime). This How To guides employers on determining withholding using the average estimated wages method.
The IRS has issued a proposed Revenue Procedure that provides employer guidance on employee consents used to support FICA (Social Security and Medicare) tax overpayment refund claims, excluding overpayments of Additional Medicare Tax.
This Worked Example illustrates how employers should calculate an employee's total FICA withholding for each pay period.
Most states require employers to file annual reconciliation returns after the end of each calendar year. This Quick Reference chart summarizes each state's filing requirements.
State wage payment laws control how often employees must be paid as well as how soon they must be paid after they perform services for an employer. This Quick Reference chart summarizes state requirements regarding pay frequency, lag time and noncompliance penalties.
An explanation of the process of payroll withholding of federal, state and local income taxes and Social Security and Medicare (FICA) taxes.