Payroll Taxes Demystified: A Breakdown for Accountants and CPAs Serving Business Owners

Payroll taxes encompass various taxes that employers are required to withhold from employees’ wages and pay to the appropriate tax authorities. These taxes fund social insurance programs such as Social Security, Medicare, and unemployment benefits.

Here’s a quick breakdown of payroll taxes:

• Federal Income Tax Withholding: Employers must withhold federal income tax from employees’ wages based on their W-4 Forms and Internal Revenue Service (IRS) guidelines. The amount withheld depends on several factors, including filing status, exemptions, and taxable income.
• Social Security Tax: Employers and employees each contribute 6.2% of wages (up to a limit determined by the Social Security Administration—SSA) to fund Social Security benefits. The wage base limit is subject to annual adjustments.
• Medicare Tax: Employers and employees each contribute 1.45% of wages to fund Medicare, with no wage base limit. (High-income earners may be subject to an additional 0.9% Medicare tax on wages exceeding certain thresholds.)
• Federal Unemployment Tax (FUTA): Employers are responsible for paying FUTA tax, which funds unemployment benefits for workers who lose their jobs. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages, but most employers receive a credit of up to 5.4% for paying state unemployment tax.
• State and Local Taxes: In addition to federal taxes, employers must withhold state and local income taxes (where applicable) based on the locations where the employees live and work. State unemployment taxes (SUTA) may also apply, with rates varying by state and the employer’s experience rating.
• Other Payroll Costs and Deductions: In addition to taxes, businesses may incur other payroll costs and deductions, including workers’ compensation insurance, state disability insurance, paid leave, health care costs, retirement plan contributions, reimbursements, stipends, and extra withholdings. Finally, some states and cities require employers to withhold special taxes for supplemental wages, such as bonuses and commissions.

Compliance and Reporting

Ensuring compliance with payroll tax regulations involves timely and accurate reporting to various tax authorities. As an accountant or CPA, you play a vital role in:

• Calculating and withholding taxes correctly.
• Filing tax returns and remitting payments on time.
• Maintaining accurate records of wages, taxes withheld, and employment tax deposits.
• Staying updated on tax law and regulation changes so you can better advise your clients.

2024 Payroll Taxes

For 2024, there are several changes and important considerations regarding federal, state, and local payroll taxes:

• Federal Payroll Tax Rates: The Social Security tax rate remains at 6.2% for both employees and employers.
  • Maximum Taxable Income: The SSA announced that the maximum earnings subject to Social Security taxes increased to $168,600 in 2024.
• Medicare tax rate stays at 1.45% for both employees and employers. An additional Medicare tax of 0.9% applies to employees with income of $250,000(if they’re married filing jointly), $125,000 (if they’re married filing separately), and $200,000 for all other taxpayers.
• FUTA tax rates remain at 6% for employers on the first $7,000 paid to each employee.
• State and Local Payroll Taxes: It’s critical to stay current on state and local payroll taxes in the client’s location/locations. State unemployment tax payments are based on a wage base, which varies by state.

Penalties for Missed or Late Payments

The IRS imposes penalties for missed or late payroll tax deposits, ranging from 2% to 15% of the unpaid amount, depending on the duration of the delay.

Businesses must stay informed about these changes to ensure compliance with federal, state, and local payroll tax regulations, avoid penalties, and maintain financial stability.

Out-of-State Employees

Your business clients who hire employees in other states must register with that state’s tax department to contribute payroll and unemployment taxes. Your client will be assigned an employer tax account number for the state.

Employers are still accountable for withholding federal income taxes in the eight states that don’t collect state income tax (Wyoming, Washington, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska).

States with “State Tax Reciprocity Agreements” enable employees who work in one state but reside in another to pay income taxes solely to their state of residency. Under these agreements, employees must furnish a non-residency certificate to their employer for residency state tax withholding rather than paying taxes to the state where they work. It’s important to note that reciprocity is determined by the employee’s home address, not their work address. Currently, the following states have reciprocity agreements:

• Arizona (with California, Indiana, Oregon, and Virginia)
• Illinois (with Kentucky, Michigan, and Wisconsin)
• Indiana (with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin)
• Iowa (with Illinois)
• Kentucky (with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin (Note: Virginia and Ohio’s agreements are conditional, so check with the states on those conditions)
• Maryland (with Pennsylvania, Virginia, West Virginia, and Washington, D.C.)
• Michigan (with Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin)
• Minnesota (with Michigan and North Dakota)
• Montana (with North Dakota)
• New Jersey (with Pennsylvania)
• North Dakota (with Minnesota and Montana)
• Ohio (with Indiana, Kentucky, Michigan, Maryland, Pennsylvania, and West Virginia)
• Pennsylvania (with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia)
• Virginia (with Kentucky, Maryland, Pennsylvania, Washington, D.C., and West Virginia)
• Washington, D.C. (with Maryland and Virginia)
• West Virginia (with Kentucky, Maryland, Ohio, Pennsylvania, and Virginia)
• Wisconsin (with Illinois, Indiana, Kentucky, and Michigan)

Paying payroll taxes can be a daunting task for business owners, but with expert advice and guidance from their CPAs, it becomes more manageable. By understanding the complexities of payroll taxes and staying abreast of regulatory changes, you can provide valuable assistance to your clients so they can meet their tax obligations while optimizing their financial strategies.

Nellie Akalp is a passionate entrepreneur, recognized business expert, and mother of four. She is the CEO of CorpNet.com, the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States. Loved by entrepreneurs, accountants and lawyers, CorpNet offers transparent pricing and a simple ordering process. Payroll service providers and larger firms appreciate CorpNet’s quickly scalable software and API solutions.