Tax Liability
Understand tax liabilities, including employee and employer obligations, reporting, and payment timelines.
Overview
Tax liability refers to the total amount of taxes that a business and its employees are responsible for, based on income, wages, and other taxable activities. In the payroll context, both employees and employers have tax obligations that must be calculated, reported, and paid within specific timeframes. This article explains the basics of employee and employer taxes, as well as the timelines for reporting and payment.
Employee Taxes
What are they?
Employee taxes are deductions withheld from an employee's paycheck, including federal income tax, Social Security, Medicare, and state or local taxes, depending on where they live and work. These taxes are the employee’s responsibility, but it is the employer’s duty to withhold and remit them.
How are they calculated?
Employee taxes are typically calculated based on:
- Taxable wages: Generally, the more an employee earns, the more tax they owe.
- Filing status and allowances: Based on the employee’s Form W-4 and/or state withholding form, which determines the amount of tax to withhold.
- Tax rates: Federal, state, and local income tax tables or rates, as well as fixed percentages for Social Security (6.2%) and Medicare (1.45%).
This is general guidance. For specific questions about a particular tax, please refer to the corresponding help center article.
Employer Taxes
What are they?
Employer taxes are taxes that businesses are required to pay based on the wages they pay their employees. These taxes include the employer's share of Social Security and Medicare (FICA taxes), federal and state unemployment taxes (FUTA and SUTA), and other taxes as specified by the state or local tax authorities.
How are they calculated?
Employer taxes are generally calculated as follows:
- FICA taxes: Employers match the 6.2% for Social Security and 1.45% for Medicare that is withheld from employees.
- FUTA/SUTA: FUTA is calculated at 6% on the first $7,000 of wages per employee, though credits can reduce this rate. SUTA rates vary by state and employer experience ratings.
This is general guidance. For specific questions about a particular tax, please refer to the corresponding help center article.
When Tax Liability is Incurred
Tax liability is incurred on the check date as employees earn wages. This is true for both employee and employer taxes.
When Taxes are Reported
Tax reporting for payroll taxes follows a structured schedule based on the type of tax and the reporting requirements. Taxes are generally reported either quarterly or annually, depending on the tax agency and employer requirements.
- Quarterly (Form 941): Employers are required to report federal income tax withholdings, Social Security, and Medicare taxes every quarter using IRS Form 941. This form provides details on all wages paid, taxes withheld, and the employer’s share of FICA (Social Security and Medicare). Filing deadlines are typically at the end of the month following the close of each quarter:
- Quarter 1 (Jan–Mar): Due by April 30
- Quarter 2 (Apr–Jun): Due by July 31
- Quarter 3 (Jul–Sep): Due by October 31
- Quarter 4 (Oct–Dec): Due by January 31 of the following year.
- Annual (Form W-2): By January 31, employers must file Form W-2 for each employee, summarizing their total earnings and tax withholdings for the year. Copies must be sent to both the employee and the Social Security Administration (SSA).
- Annual (Form 940 for FUTA): Employer-paid Federal Unemployment Tax (FUTA) is reported annually using Form 940. The form covers total employee wages and any unemployment tax credits. The deadline for filing is January 31 of the following year, with a potential extension to February 10 if all taxes have been deposited on time throughout the year.
This is general guidance. For specific questions about a particular tax form, please refer our corresponding help center article on link.
When Taxes are Paid
The timing of tax deposits is influenced by several general factors:
- Total Tax Liability: Lower liabilities may allow for less frequent deposits, while higher liabilities require more frequent payments.
- Look back Period: Employers are often evaluated based on their past tax liabilities to determine their deposit frequency.
- Payroll Schedule: The timing of employee pay periods affects when deposits are due.
- Thresholds: Exceeding certain thresholds in tax liability may require immediate payment.
Additionally, state unemployment taxes are typically due at the end of the month following the close of the quarter and state income tax can vary by employer.
This is general guidance. For specific questions about tax deposits, please refer to the corresponding help center article on link.
Recording
Last updated on June 30, 2024