Overview Of the Payroll Taxation System in the USA

by Jack John Outsourcing Partner for Bookkeeping and Accounting

Payroll is a cumbersome and tedious task. It needs efficiency, knowledge, and expertise to undertake these services. Outsourcing companies hold these traits by employing experienced, talented, and proficient people to handle such activities. 

Moreover, since they cater to multiple businesses, their experience speaks for itself. The payroll taxation system in the USA has many provisions for start-ups and established businesses. Payroll outsourcing companies help firms comply with these regulations. The standard payroll tax rules in the US are as follows:

Obtaining an EIN:

Every business employing human resources for long-term work should apply for an Employer Identification Number. It is like the Social Security Number, except it differentiates every business. It is a must for every business to obtain as they pay taxes under this number, and the IRS recognizes the submissions accordingly. 

Federal Taxes:

Payroll taxes in the US get divided into federal and state levels. These taxes need to get withheld from employee paychecks. Also, some of these involve employers contributing a percentage to these taxes. The federal taxes include:

Federal Income Tax (IT)

It is a pay-as-you-go tax deducted from the employee's paycheck every time they receive their wages or salaries. The IRS, under Publication 15- The Employers' tax guide, publishes withholding tables each year that determine the percentage of the deduction tax rate. The employer is responsible for withholding these taxes. 

Federal Insurance Contribution Tax (FICA)

These are shared taxes where employer and employee contribute evenly. They include Medicare and Social Security taxes. The tax rates for these taxes get reviewed annually. The employer is responsible for withholding employees' portion from their paychecks and submitting the total amount to the IRS on time. 

Federal Unemployment Taxes (FUTA)

The employer is 100% responsible for these taxes. These involve funding the unemployment fund to support the employees leaving the company involuntarily. Employers receive credit based on SUTA tax payments. 

State Taxes

State taxes involve submitting taxes to the state governments and not the central (federal) government. These include:

State Income Tax

The employers withhold the state income tax amounts from each payroll employee's paycheck. However, some states offer exceptions. 

State Unemployment Tax (SUTA)

These taxes work together with FUTA. The state authorities determine the rates and assign them to firms upon registration. Financial accounting allows the computation of these taxes. Although most states hold only employers responsible for paying these taxes, a few exceptions allow sharing between employers and employees in equal amounts. 

Local Taxes

The local taxes vary based on every region. These include school board, transit, local income, municipality, and other taxes. The tax authority and type determine the responsibility for these taxes. 

The IRS (Internal Revenue Service) is responsible for federal taxes, whereas relevant tax authorities exist for state and local taxes. There are set schedules for payments on time. A change in the program causes authorities to send notifications to businesses. Regular reporting through different forms is a must for employers to comply. 

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Created on Aug 4th 2022 04:41. Viewed 174 times.

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