The payroll tax is applicable for a full-time employee whose annual income is subject to income tax. You as an employer are responsible for paying the payroll tax on behalf of your employee. The amount calculated for withholding the tax from your employee’s paycheck generally includes three specific deductions for Social Security, Medicare, and income tax.

Payroll tax withholding is a mandatory procedure and must be done before the end of the assessment year to calculate the taxes. The Internal Revenue Service (IRS) issues a withholding table that specifies the tax brackets applicable for service providers and employers separately. A payroll tax withholding table provides estimates after taking into account pertinent factors including employee income, marital status, and withholding allowances.

Year after year, changes are made to the current payroll tax withholding table to reflect new financial policies, decisions, and tax implications of the proposed budget for a particular term. Revisions include tax rates, tax brackets, standard deductions, personal exemptions, and other changes approved by the IRS that will be reflected in the revised payroll tax withholding table schedules.

As an employer, you must understand the different types of payroll taxes to provide a reasonable estimate of the withholding.

Federal income tax
Payroll withholding for federal income tax will include contributions made for Social Security and Medicare primarily. The amount mainly constitutes contributions that form part of the Federal Insurance Contributions Act (FICA) tax. You can refer to the IRS publication 15, the employer’s tax guide, and supplemental guides to understand the direct tax implications of revisions to the payroll tax withholding table.

Social Security and Medicare
Employers must withhold a percentage of the contributions made to Social Security and Medicare to share the tax burden. As per the updated payroll tax withholding table, Social Security deduction for withholding is set at 12.4% on wages up to $128,400 and 2.9% for Medicare on all wages. As an employer, you must share the tax burden equally with the employee. Note that when the wages exceed $200,000, the employee must pay an additional 0.9% Medicare tax.

Federal Unemployment (FUTA) Tax
As an employer, you are also responsible for paying unemployment taxes that are separate from the amounts withheld for Federal income, Social Security, and Medicare. Note that the tax burden for unemployment is completely borne by you as the employees are not required to pay the tax or have it withheld in the first place.

Other taxes for payroll withholding include city, county, school district, and state disability taxes.

Apart from the aforementioned statutory deductions, there are voluntary deductions that the current payroll tax withholding table specifies for additional benefits. These amounts include contributions and premiums for health insurance, life insurance, retirement plans, employee stock purchase plans, employee meals, uniforms, and similar job-related expenses.

Financial and tax implications of revisions made to payroll tax withholding table
The estimate is based on the revisions made to the payroll tax withholding tables that will directly impact your income assessment and mainly include the following:

• The gross pay for each individual employee
• Latest revisions made to payroll tax withholding tables with reference to IRS publication form 15-A
• FICA percentages for the current year
• Social Security limits on withholding for the current year

The estimates will vary depending on the method of calculation and the payroll period. The wage bracket method and percentage methods are the two most widely used when it comes to estimating your payroll tax withholding. The IRS allows daily, weekly, biweekly, semimonthly, monthly, quarterly, semiannual, annually, and miscellaneous payroll periods to be taken as the basis for your estimation. The IRS publication 15 also provides alternative modes of calculation based on formulas to determine estimates for different types of assessees.

Employer tax responsibilities
Withholding requires both the employer and employee to share the tax burden for contributions made from federal income, Social Security, and Medicare. However, once the calculations are in order, you are responsible for the following actions to be taken promptly.

• The first step is to pay the employers the share of payroll withholding
• You are also responsible for depositing the amounts withheld from your employee’s paychecks
• Reconciliation of amounts is the next step to account for the withholding
• You must account for all payroll expenses through financial reporting
• Finally, file for payroll tax returns promptly within the stipulated time

Employer reporting responsibilities
As an employer, you must also report all payroll tax obligations in a timely manner. Employer reporting requirements include the following:

• Filing particulars of Form 940 and 940EZ to report Annual Federal unemployment tax returns
• Reporting Employers quarterly payroll tax return with form 941
• Reporting annual return of Federal income taxes withheld with form 945
• Filing particulars of all wage and tax statements with form W2

All reporting is in addition to the main W4 forms filed for individual employees.