How To Calculate Employer Payroll Contributions

Hiring employees for your business will entail responsibilities especially in the preparation and filing of payroll tax returns. There is also the matter of withholding taxes from your employees' wages. This has been the standard practice since the implementation of the federal income tax. In effect, the system makes every employer in the country act as deputy tax collector.

Everything must be accounted for and if your employees receive tips as part of the compensation even if it is not included in their pay check, those amounts must also be included on the payroll tax returns. Here is a simple guide to calculate for your payroll contributions.

  • Form 941. You would need to get a copy of Form 941 which is the Employer's Quarterly Federal Tax Return. It is the tax return used to report payroll taxes. You can download the form from the IRS website. It may help if you can printout several copies since you will be using it every quarter of the year.
  • Fill in the blanks. With the copy of the Form 941, fill out all the required areas for the employer information as well as the employer identification number (EIN). On the form, indicate which quarter of the year it is being filed.
  • FICA tax. Get the total wages and tip income which is subject to the Federal Insurance Contribution Act commonly known as the FICA tax. FICA consists of both Social Security and Medicare taxes which are paid for by the employees and the employer. The two parties pay half of these taxes which should add up to 15.3% total FICA tax.
  • Employer Contribution. Add the withholding income tax from the employees' wages to the Social Security and Medicare taxes (FICA). This will be the employer contribution. If there are payments made for advance earned income credits for the employees from the tax liability, you need to subtract this figure from employer contribution; this is the tax due for the employer.
  • Payment. After the computation, file the Form 941 and pay for the tax due. Remember that if the tax due is $2,500 and below, you would have to pay for it upfront. If the tax due is more than $2,500, then you have to make deposits.

The taxation system being implemented makes it work in such a way that withholding reduces the cost of tax collection for the IRS. The employer payroll contribution also reduces the tax paperwork that the employees otherwise have to complete for themselves. Remember that as an employer, you are mandated by law to send the taxes collected at withholding. Failure to comply will leave the employer liable for back taxes, penalties and corresponding interest not to mention the possibility of a criminal prosecution from the IRS.

It is the taxes that fuel the economy and without the much needed tax collection, social services, Medicare and other projects funded by your taxes will be greatly affected. By filing the accurate contributions, you are doing your part in helping the economy as a whole.


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