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Withholding payroll tax
Here are some of the basic issues of withholding income and payroll taxes when you pay your employees:
- Amounts to withhold. You withhold FICA taxes at the rate of 6.2% of the employee's first t $97,500 in income in 2007 for OASDI. You withhold an additional 1.45% of income for Medicare taxes. There is no limit on the amount of income that is subject to Medicare taxes. As employer, you pay the same amounts to the IRS as your share of FICA taxes.
There are two primary methods to calculate the amount of income tax withholding. The wage-bracket method requires you to calculate the amount withheld based on your pay-period frequency, the employee's marital status, and number of personal allowances the employee claims. Withholding tables for pay periods that range from daily to annual frequencies are in IRS Pub. 15.
The percentage method is a two-step process that uses one general table and one specific table to calculate the income tax you withhold. These tables are also in IRS Pub. 15. For information on other income-tax withholding methods, see IRS Pub. 15-A.
- Relevant forms. When an employee is added to your payroll, they must complete a W-4: "Employee's Allowance Withholding Certificate." The W-4 is the employer's main guide to calculate how much to withhold. It shows the employee's marital status, number of personal allowances, and how much additional income he or she wishes to withhold from each paycheck.
If an employee requests that you withhold an amount that is different from the amount shown in the current W-4, you should request a new W-4 to reflect the desired withholding. An employee may request in his W-4 that you do not withhold income taxes. However, you are required to withhold FICA taxes.
If you withhold payroll or income taxes, you must file
IRS Form 941. You must file every calendar quarter. Each filing should be for a single quarter. If you file or pay taxes late, you will likely owe penalties. You can choose to file electronically using the IRS's e-file program. (Note: If you have any backup withholdings on non-payroll income such as bonuses or pensions, you must file IRS Form 945.)
- Timing of tax deposits. You make payroll and income tax payments to IRS on either a monthly or semi-weekly deposit schedule. To determine which schedule to use, check the amount of total tax you reported on Form 941 during the relevant lookback period. For tax year 2007, the lookback period begins on July 1, 2005 and ends on June 30, 2006.
If you reported $50,000 or less in total taxes during the lookback period, you must use the monthly deposit schedule. If your tax liability was more than $50,000, you must use the semi-weekly deposit schedule.
The deposit schedule you use does not have to match your pay-period frequency. For example, if you pay employees weekly and use a semi-weekly deposit schedule, you make tax payments for a payroll period on the next due date for your deposit schedule. For more information on monthly and semi-monthly deposit schedules, see IRS Pub. 15.
- Making tax payments. You remit payment by cash, check, or money order at a financial institution that is authorized to take payments on behalf of the IRS. You can also use EFTPS, the IRS's electronic-payments system.
- Related issues. If you hire employees who are not U.S. citizens, you will likely face slightly different withholding requirements. For more information, see IRS Pub. 515.
If you have tax liabilities of $100,000 or more during a payroll period, the IRS requires you to deposit the tax by the next banking day. It does not matter whether you use the monthly or semi-weekly deposit schedule. On the other hand, if you have an estimated annual employment tax liability of $1,000 or less, you may be able to file Form 944 annually beginning in
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