There is no denying that paying your taxes is one of the vital steps to keeping your business running. A key to success is making payroll taxes your best friend. To put it most simply, payroll tax is a percentage withheld from an employee’s pay by the employer. The employer then pays that tax to the government on the employee’s behalf.
Essentially, payroll taxes are taxes paid on the wages and salaries of employees. These taxes finance important social insurance programs, such as Social Security and Medicare. Although employees don’t enjoy seeing their paycheck smaller than they expected, there are core benefits to payroll taxes.
Here is what you should know about payroll taxes:
Social Security Payroll Tax
Social Security taxes go into two trust funds: the Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits, and the Disability Insurance Trust Fund, which pays disability benefits. The 65-year-old version of your employees can rest assured that there’s a financial plan in progress. There’s no need to worry when you pay your dues when you’re still young.
Medicare Payroll Tax
These payroll deductions go into two separate trust funds as well: the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund. The first fund covers a variety of areas, such as hospital care, skilled nursing inpatient care and home care. The latter fund covers laboratory tests and screenings, outpatient care, x-rays, ambulance service and prescription drugs.
These funds cover a substantial part of the costs associated with health problems. In the United States, hefty medical bills are a major concern for many. The payroll taxes that go to Medicare ensure that employees will have adequate health care even after they retire.
Source of Government Revenue
Not only are employees benefiting from payroll taxes by building a safety net; the government relies on these taxes, too. According to the Tax Foundation, Social Security and Medicare Payroll taxes make up 15.3% of combined federal, state and local government revenue. These two are the largest of the social insurance taxes. However, all of the social insurance taxes put together create 23.05% of the revenue, making it the second largest source of government revenue in the country.
Employer Payroll Tax Responsibilities
As an employer, you are responsible for covering half of the employee’s payroll taxes — 7.65% to be exact. Companies can expect to perform other tax-related duties as well, such as depositing tax dollars withheld from employees’ paychecks, filing payroll tax returns, preparing reconciliation reports and accounting for the payroll expense through their financial reporting.
Additionally, you are required to report payroll tax obligations and should always aim to deposit payroll taxes in a timely manner. Failing to do so may carry grave consequences.
Key Takeaway: Payroll Tax Matters
Pay your payroll taxes on time! Employees, build that safety net before you need it. Employers, not paying these taxes when they are due is a quick and easy way to go out of business. Remember to keep the IRS on your side.