Payroll taxes refer to the amount that is deducted by the employers, from employee salaries to pay to the government. This money is used by the government to facilitate citizens with healthcare, infrastructure, grants, and other social security services. 

To ensure that both employees and the state receive their fair share, payroll taxes are an important aspect of operating a firm. Business owners must understand payroll taxes because failure to comply with them can have major repercussions.

Although it is our legal and ethical responsibility to pay these taxes, many employers are confused about how payroll taxes work. Payroll taxes are withheld from employees’ salaries. The government then receives these taxes to pay for other initiatives like Social Security, Medicare, and unemployment insurance. Payroll taxes must be correctly withheld from employees’ paychecks and paid to the authorities on time.

There are four types of Payroll Taxes: 

Federal Income Tax Withholding: This tax is charged by the IRS. The amount deducted depends on the information given by the employee while filing taxes. 

Social Security Tax: Employers and employees each pay a portion of the Social Security tax. This is usually 12.4%. However, it varies on individual income level. 

Medicare Tax: This tax is used to finance Medicare, a health insurance program. Similar to Social Security, almost 2.9% is split between employers and employees.

FUTA: Federal Unemployment Tax, is only paid by the employer, and it helps fund state unemployment insurance program

The payroll tax deduction is dependent on the exemptions claimed by the employee on their W-4 form. The employers have to match the employee payroll taxes per the requirement by the government. 

During our combined 25 years of serving in the tax industry, we have seen numerous cases where businesses face severe back taxes due to unpaid payroll taxes. If the payroll taxes are unpaid, the IRS/state can hold the individual responsible for payroll tax debt personally liable for the debt. The responsible individual can be personally subject to federal tax liens and enforcement action.

If a business continues to accrue payroll taxes, the IRS or state can even require a business to seize its operations and shut down the business.