Know Your FICA from Your FUTA: an Overview of Tax Returns and Deposits
Handling tax returns and deposits are among a business owner's key responsibilities. This includes the obligation to withhold specific employment taxes from employees' pay, including federal income tax, Social Security and Medicare, and state and local income tax.
Here's a quick look at how to help ensure you're meeting your legal and fiduciary responsibilities.
Employer Tax Deposits
Employee-paid and employer-paid taxes must be deposited by a business owner on a schedule determined by relevant federal, state, or local tax agencies. These deposits may be due daily, twice per week, monthly, or quarterly, depending on the tax liability sums involved. As the tax year draws to a close, the Internal Revenue Service alerts employers of the frequency of deposits for the year ahead. What's important to remember is that, whether or not you receive an IRS notice, or whether an incorrect notice was sent out, you are still responsible for depositing federal taxes at the proper frequency for the year.
If your business is mandated for EFTPS (Electronic Federal Tax Payment System), tax payments are made electronically using Form 941 (the Employer's Quarterly Federal Tax Return) each quarter to reconcile anticipated taxes with actual taxes paid. Employers who fail to comply with this regulation face penalties assessed by the tax agency.
Also, state and local withholding gets paid to state or local agencies directly, based on those agencies' deposit schedules.
Most employers are required by law to pay these taxes:
Social Security and Medicare (FICA)
Regardless of what employees contribute to Social Security and Medicare, employers are responsible for the entire tax. Once the total liability has been calculated and the correct amount subtracted from employees' paychecks, the remaining portion must be paid by the employer.
Federal Unemployment Tax (FUTA)
Employees who lose their jobs are entitled to payments through the Federal Unemployment Tax Act, together with state unemployment insurance programs. This tax cannot be deducted from employee wages, because it is solely an employer tax.
State Unemployment Insurance (SUI)
Employers pay SUI tax based on how many workers are employed and at a rate the state has determined. This tax is closely linked to FUTA, though compensation benefits are paid from the state fund. Every state has limits on the amount of taxable compensation for SUI.
Some states mandate that either an employer or employee make a contribution to its disability program, providing benefits to employees who lose time from work due to illness, accident, or non-employment-related disease. How much is paid by employers and workers varies from state to state.
The majority of federal and state agencies require businesses to report the use of tax returns, as well as employer, and employee wage and tax information once each quarter. Returns generally include an employee's name, Social Security number, and gross wages paid for the quarter. This information helps verify an employee's eligibility to receive state unemployment insurance (as well as how much compensation benefits are to be paid). Tax returns also reconcile the tax deposits remitted.
Obviously, handling tax returns and deposits can be a complicated activity. But while the ultimate responsibility for meeting these obligations belongs with employers, there are many resources available to help with calculating and depositing payroll taxes and filing tax returns, such as the IRS website.