If you are a business that issues paychecks, you need to withhold taxes from your employees before sending them to the government. Payroll tax and income tax are the most common deductions. Two essential parts of payroll management are understanding their differences and ensuring that withholding is calculated correctly. They could also provide you with much-needed tax relief solutions down the road.
Understanding Payroll Tax
FICA taxes (short for the Federal Insurance Contributions Act) refers to the payroll taxes used to fund Social Security and Medicare. You may hear this called FICA, which stands for the Federal Insurance Contributions Act, the law that created payroll taxes.
Here’s how it’s broken down:
- Medicare: Each year, the employer deducts Medicare taxes of 1.45% from each employee’s gross wages and matches it with another 1.45%, for a total of 2.9%. The employee must also pay into Medicare; the employee’s contribution is 15.3% of the first $200,000 he earns annually or 15.3% of the first $250,000 that his spouse earns, with no limit for earnings over $250,000.
- Social Security (SS): Every employee must pay 6.2 percent of their income, and the employer matches the tax for each employee. The government puts a cap on the total earnings each year; any amount earned above $142,800 (as of 2021) is not subject to social security tax, which is one of the default tax relief solutions available to those in that income bracket.
Understanding Income Tax
On the other hand, income taxes are money taken from employees’ wages. Federal, state, and local governments collect taxes to fund their programs. The Internal Revenue Service (IRS) sets the laws and rules for calculating and collecting income tax.
Each employee pays different taxes depending on personal elections and wages earned. As a business, you don’t pay this tax for your employees, but you are required to withhold them from their paychecks.
Here’s how to calculate one’s withholding income tax:
- Employees are in charge of making the majority of choices here: they’ll fill out Form W-4 so that you know how much tax to withhold from their paychecks, based on their household and personal financial circumstances. They’ll need to fill out a Form W-4 when they start a job with you.
- Even though you’re not paying the employee tax as their employer, it is essential to manage the withholding correctly and ensure that the proper amount is sent to the IRS. You can do this by checking out the IRS’s Publication 15, Employer’s Tax Guide, as well as its online Tax Withholding Assistant tool, which creates a spreadsheet calculating the right amount of federal income tax to deduct for each employee.
How to File Both without any Hitches
Whether you handle compliance yourself, have a staff member help, or outsource the task, it’s essential to allocate enough resources to submission to ensure the job is done right to get the best tax relief solutions. You can do so through the following:
- Enlist the help of an accountant or tax professional. Then, use the right accounting software to keep yourself organized.
- Create pay stubs for each employee, as these documents show an employee’s gross wages and payroll taxes withheld.
- Keep a calendar of federal, state, and local deadlines to avoid missing payments.
Work with the Experts to Get Tax Relief Solutions
To protect your business and the people you rely on the most—your team—you must understand your tax responsibilities. Opening a business checking account will help you stay on top of your finances since you’ll be working with experts who can help you navigate the fiscal world.
Contact Axiom Tax Resolution Group now for tax relief solutions and more! We are tax resolution specialists from Birmingham, Alabama, ready to find a permanent solution to your tax problems with the IRS! Visit our website for more information!