Upgrade to remove ads
Only $35.99/year

4 - Payroll Taxes

Terms in this set (29)

What are payroll taxes?
A percentage that employers withhold from employee wages. Employers need to withhold several employment taxes (and insurances (Workers' Comp if in WA or WY) from employee paychecks.
What do employee payroll taxes consist of?
Social security, medicare, and income taxes
What does social security tax fund?
Social Security tax funds benefits for retirement, dependents of retired workers, and the disabled and their dependents.
What does Medicare tax fund?
Medical benefits for people once they reach age 65.
What are Medicare and Social Security tax collectively called?
FICA (Federal Insurance Contributions Act)
Who pays FICA tax?
Both the employer and employee pay FICA tax.
What percentage of FICA should be calculated on paychecks?
The employee share of FICA :
1.45% Medicare
6.2% Social Security
The employer share of FICA:
1.45% Medicare
6.2% Social Security
When should FICA taxes be deposited?
FICA is deposited either monthly or semiweekly (along with federal income tax withholdings for the employee).
When is an employer considered a monthly depositor for FICA and federal income taxes?
If an employer reports $50,000 or less in taxes in the lookback period. A new employer is considered a monthly depositor during the first year.
When is deposits due for monthly depositors?
The money employers withhold from employee wages for the whole month is due to the IRS by the 15th of the following month.
When is an employer considered a semiweekly depositor for FICA and federal income taxes?
If employer reported taxes are more than $50,000, they will make semiweekly FICA tax deposits. If they pay their employees on Wednesday, Thursday, or Friday, they must deposit taxes by the following Wednesday. If they pay employees on Saturday, Sunday, Monday, or Tuesday, deposit taxes are due by the following Friday.
Is it possible for employee's wages to be exempt from Social Security and/or Medicare tax? For what reasons?
It is very rare, but, yes, here are possible reasons why:

- Tip compensation: If the employee earned less than $20 per month in tips, their tip compensation is exempt from FICA tax.

- Partner: If the business is a partnership, there is no FICA tax for payments to partner.

- Deceased worker: The wages paid to the worker's beneficiary the year after the worker's death are exempt from FICA tax.

- Disabled worker: Wages paid the year after the worker qualified for disability insurance benefits are exempt if the worker didn't perform a service for the employer during payment period.

- Some nonresident aliens: Consult the IRS for a complete list of exempt nonresident aliens.

- Religious sects: If both the employee and employer are members of a recognized religious sect and work for a church or church-controlled nonprofit, there could be an exemption from FICA tax. To apply for exemption from FICA tax, file Form 4029
In general, who imposed income taxes?
The federal government imposes a federal income tax and some states/localities have income taxes, too. These taxes are employee taxes (not employer).
What is the purpose of income taxes?
They fund public services such as defense, education, and transportation.
Where do income taxes come out of?
Employee wages only. Employers do not contribute toward income taxes.
How are income taxes withheld?
Employers will withhold income taxes based on tax tables (or percent method) and how many allowances the employee claims on a withholding certificate (W-4).
What are unemployment taxes that employers have to pay?
Employers have to pay federal unemployment tax and state unemployment insurance.
How does state income tax work?
State income tax works similarly to federal income tax. If there is a state income tax, employers will give the employee a state income tax withholding form (similar to the federal W-4). Employees can claim allowances from state income tax. Depending on the business's location, there may also be a local income tax.
What does FUTA stand for?
Federal Unemployment Tax Assessment
What does SUTA stand for?
State Unemployment Tax Assessment
When it comes to FICA payroll taxes, how much do employees and employer pay?
Employees and employers pay the same amount. It is broken into two parts: Social Security tax rate and Medicare tax rate
What is the Social Security tax rate? How is it paid?
It is split between the employer and employee. Employees pay 6.2% (this is withheld from their wages) and employers pay 6.2%. There is also a wage base limit for this tax.
What is the medicare tax rate? How is it paid?
Medicare is equally paid by the employer and employee. Employers will pay 1.45% and withhold 1.45% from employee's wages.
True or False: There is not a cap on Medicare tax.
True
When does additional Medicare tax kick in?
An employee will owe an additional Medicare tax of 0.9% on wages more than $250,000 if married filing jointly, $125,000 if married filing separate, or $200,000 for everyone else.
What do self-employed individuals have to pay?
Self-employed people have to pay self-employment tax for both portions of FICA (employee and employer).
What forms are used to report federal withholding taxes?
Form 941 and Form 944
What is the difference between form 940 and form 941/944?
Form 940 is an annual form that reports FUTA. The 941 form is a quarterly return that reports FICA and federal income taxes. The 944 form is the same as the 941 form, except it is filed annually.
What is the difference between Form 941 and Form 944?
Form 941 is reported on a quarterly basis and Form 944 is reported annually. Employers will be required to submit one or the other for all employees.
Recommended textbook solutions

Principles of Microeconomics

7th EditionN. Gregory Mankiw
754 solutions

Principles of Microeconomics

8th EditionN. Gregory Mankiw
776 solutions

Essentials of Investments

8th EditionAlan J. Marcus, Alex Kane, Zvi Bodie
663 solutions

Principles of Macroeconomics

5th EditionBen Bernanke, Robert Frank
443 solutions