As a small business owner, you are required to withhold payroll taxes from employees’ paychecks and to pay applicable federal, state, and local taxes. The taxes usually withheld from employee paychecks include FICA (Medicare and Social Security taxes) and federal, state, and local income taxes.
Some states also require other kinds of taxes, such as FUTA (Federal Unemployment Tax Act) and disability insurance taxes (in California, Hawaii, New Jersey, New York, and Rhode Island). The exact amount of Federal Income Tax, Social Security, and Medicare taxes that need to be withheld are determined based on the information that employees list on their W-4s.
For Social Security and Medicare taxes, companies must then pay the matching amount. Payroll taxes are due every time employees get paid, but if you believe your employment taxes will be less than $1,000, you can fill out a form and request to file employment taxes once a year. Also be aware that the IRS now requires all businesses to deposit employment taxes via the Electronic Federal Tax Payment System (EFTPS).
If your business is incorporated or does not have employees, you are still eligible to withhold payroll taxes from your own paycheck, since you are essentially your company’s only employee. If your business is not incorporated, you must pay estimated quarterly self-employment taxes.
Many businesses enlist the help of an accountant or a third party payroll service provider to organize and implement these obligations. Payroll service providers can help your small business meet filing deadlines and streamline business operations. Just remember that employers are ultimately responsible for the payment of income tax withheld, and both the employer and employee portions of Social Security and Medicare taxes.
Two other third party payroll arrangements include Reporting Agents (RAF) and Section 3504 Agents. For more information, check out this Third Party Arrangement Chart from the IRS website.