Payroll withholding is one of the processes in payroll maintenance that requires an employer to hold a portion of an employee’s wages for several taxes. Such amounts are directly forwarded to the federal government, the state, and in some cases the local agencies. Payroll withholding is a process that both employers and employees should know because it is important in making the income taxes compliance and remittance timely.
Payroll Withholding, What Is It?
Payroll withholding takes place when an employee is paid by deducting all taxes and levies from an employee’s earnings. Therefore, employers have to calculate, withhold, and remit these deductions to different tax authorities. The actual deduction varies with the rates established by the employee’s earnings, filing status, exemptions, and the allowances he/she claims on their W-4 form.
Types of Payroll Withholdings
Federal Income Tax
Federal income taxes from employees’ paychecks are withheld by employers because the federal government requires it. The withholding amount depends on employees’ earnings and filing status, with respect to number of allowances claimed on their W-4 form. Employers usually calculate the withholding based on the IRS tables or payroll software.
State and Local Taxes
Many states and localities do impose income taxes, hence employers need to withhold these taxes from employee wages. Jurisdictions set the rates of state and local taxes differently. Not all states have state income taxes, but those that do require withholding, and some local governments may levy additional income taxes.
FICA Taxes (Social Security and Medicare)
FICA taxes are compulsory federal payroll taxes under the Federal Insurance Contributions Act. Employers collect out of each of their employees’ earnings a tax of 6.2% for Social Security and 1.45% for Medicare. All employers are further required to match the amount of FICA taxes withheld from the employees.
Unemployment Insurance Taxes
Employers have the obligation to pay their federal and mandatory state unemployment taxes (FUTA and SUTA respectively) into the fund earmarked for the provision of benefits to the unemployed workers. The taxes cannot be paid directly by the employee, but the employer withholds a portion of the salary for such purposes and deposits it into accounts designated for such types of taxes.
Other Voluntary Deductions
Employees usually have voluntary deductions from their incomes other than obligatory taxes. Such deductions include contributions to retirement plans such as 401(k), pensions, health insurance premiums, and life insurance premiums, or any other benefit to which they’ve enrolled themselves.
How Payroll Withholding Works
Employee Completes a W-4 Form
New employees are thereby required to fill up a W-4 which indicates his/her final tax status and number of allowances for withholding federal income tax from his pay.
Payroll Computation
Employers use information provided in the W4 form to find the correct withholding. They base their calculation on the employee’s wages, allowances the employee is trying to claim and the IRS withholding table.
Deductions and Remittance
The money has to be separated from the employee’s pay every month and sent to the respective state, federal, and local tax agencies. The medicaid and social security funds are sent to the IRS itself.
Employees’ Tax Return Filing
At the close of the year, the employers provide employees with a W-2 form-one with total wages earned and tax deducted during the year. The employees use this information in filing their tax returns.
Necessity of Payroll Withholding
Regular Tax Payments
Large tax burdens are avoided by a regularity of payment of taxes throughout the year through payroll deduction. The process also restricts occurrences involving underpayments, penalties for late filers, and last-minute payments that end up attracting penalties.
Supports Social Programs
These forms of taxes deducted from employees’ payouts go towards funding for such important societal records as Social Security and Medicare. These funds sustain retiree benefits, the disabled, and senior healthcare.
Tax Compliance
Withholding helps employers to comply with the federal, state, and local tax codes by ensuring they meet their tax obligations. Employers found to misappropriate taxes stand the risk of financially painful retribution.
Employee Benefit
Employees appreciate the value of payroll withholding in simple terms, guaranteeing that they do not have to go through a great deal of surprise during the tax season. Employees can be sure that their tax obligations are promptly disposed of by spreading out taxes in paycheck amounts instead of coordinating large lump-sum paybacks.
Common Payroll Withholding Mistakes
Incorrect W-4 Information
Employees fill out their W-4 forms in error, which results in excess or inadequate tax withholding. Therefore, they should review their W-4 forms right away if there is any change in their personal or financial state of being: marriage, divorce, or birth of a child.
Not Withholding State or Local Taxes
Usually, most states have local tax requirements, but for some reason, the employer might directly overlook the tax withholding procedure of the state or local government that employs them. Employers must fulfill and comply with their state and local tax obligations at all times.
Miscalculated FICA Taxes
Miscalculation of FICA taxes is the major source of errors. One can calculate and include federal insurance contributions-both Social Security and Medicare-precisely and on time.