Payroll Processing: 4 Taxes You Have to Account For 10/22/16


For business owners, the mere mention of taxes can cause worries of compliance and affordability. Still, these are part of the business game. Companies not only have to pay their own taxes but they also have to withhold and pay taxes on behalf of their employees. It is this second group of taxes that prompts many business owners to outsource their payroll to a third-party provider.

Taxes can be especially troublesome in the payroll arena because of the complex calculations that go along with withholding and reporting. The thing is, payroll taxes are not as straightforward as they seem. There are four different taxes that have to be calculated for each employee on the payroll. Monies have to be withheld and deposited in a tax account, employers must deposit their portion of tax contributions, and everything must be reported and paid on a regular schedule.

The four taxes that have to be accounted for in payroll are:

  • federal income tax
  • state and local income taxes
  • social security tax
  • Medicare tax.

A professional payroll service should be entirely familiar with all four taxes and how to apply them to client accounts. Any business struggling to meet tax liabilities should seriously consider outsourcing its payroll to athird-party provider. Having said that, let us look at four taxes in more detail.

4-Taxes-You-Have-to-Account-For

Federal Income Tax

As with most other developed countries, the United States relies on a graduated system for income tax. This system dictates that the more a person earns, the greater the percentage of his or her income should be paid in income taxes. For the 2016/2017 tax year, single individuals making up to $9,275 are taxed at 10%. That’s the lowest rate. The highest rate is 39.6%, assessed on income earners making more than $415,051. For the record, seven different tax rates canbe applied to singles, married couples filing jointly, and heads of households.

State and Local Income Taxes

State and local income taxes are not uniform. For instance, only 43 of the 50 states assess income taxes. Local income taxes are even more rare, with only the nation’s largest cities assessing them. Still, business owners are expected to know state and local regulations for tax withholding and reporting.

Social Security Tax

Nearly every U.S. worker pays into the Social Security system through a payroll tax. Exemptions apply only to workers employed by certain religious sects that have an established, religious opposition to the Social Security system. The tax is collectedin order to provide Social Security benefits to current recipients.

Medicare Tax

The Medicare system is the government’s health insurance system for retirees. Since every citizen is automatically put into the Medicare system at age 65, every worker has to pay into the system by way of the Medicare tax. Believe or not, the majority of payroll taxes applied to paychecks is a combination of the Social Security and Medicare taxes.

Keeping track of these taxes may not be so easy to do for a small business owner who does not consider accounting among his/her strong points. Fortunately, there is software that makes the job a lot easier. Easier still is contracting payroll to an online service provider who handles all tax withholding and reporting.

Now you know the four taxes related to payroll. Make sure you understand how they work, how they are calculated, and when you have to report. If it’s too much for you to handle on your own, sign up for an online payroll service that can do the work for you. You’ll be thankful you did.