The subject of payroll taxes can be a prickly one for HR professionals and business owners. There’s a lot involved in staying compliant with payroll tax regulations, but few of us have the time to manage it.
Each new calendar year brings potential changes to a system that’s already difficult to figure out. To make matters worse, the penalties and fees for misfiling or inaccurate payroll tax deposits can be steep, especially for small businesses. So to get you ready to tackle payroll taxes in the new year, here’s what you need to know.
Understanding upcoming changes to employer taxes can help you avoid misfiling them in 2023. But to start, you need to know where your payroll taxes are actually going in the first place. If you’ve been running payroll for a while, you’re probably familiar with FICA taxes, the payroll taxes that fund Social Security and Medicare programs.
While FICA may look like a single line item on your paycheck, it’s in fact split into two calculations that determine the final amount of tax withheld: a Social Security tax rate and a Medicare tax rate.
The payroll tax rate that goes toward Social Security is currently set at 6.2%. In 2023, employees’ wages only up to $160,200 are subject to Social Security. They will not have to remit to the Social Security side of FICA in excess of $9,932.40 or 6.2% of $160,200. The tax rate for Medicare is significantly lower, at 1.45%, but all covered wages are subject to this tax. Additionally, employees that earn over $200,000 in taxable income each year, will be required to pay an additional amount of 0.9% towards Medicare tax.
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In 2022, the IRS assessed more than $23.8 billion in additional taxes for returns not filed timely and collected more than $2.3 billion with delinquent returns. That’s not exactly chump change for a small business. If these mistakes are seemingly so common, how do you avoid them? When exactly do you need to deposit your payroll taxes? It all depends on what’s referred to as your “lookback period.”
Your lookback period is how the IRS determines your payroll tax deposit schedule. It’s based on your total gross payroll tax liability for the 12-month period that ended on the June 30 of the previous year. Essentially, the amount of taxes reported during this time will determine your payroll deposit schedule — either on a monthly or semi-weekly schedule — based on how much payroll taxes you owed in the past.
To find your total payroll tax liability, look at your 941 Forms for each quarter within your lookback period. (If you’re new to this or have other questions, check out our Know the Basics guide for Form 941.)
You’ll see the amount paid that quarter under Line 12: Total Taxes After Adjustments and Credits. The sum of these four quarterly 941 Forms from the lookback period will tell you when you’ll need to deposit payroll taxes.
If the total taxes on Form 941, Line 12: Total Taxes After Adjustments and Credits, for all four quarters of your lookback period were $50,000 or less, then you are a monthly schedule depositor for the year. You’ll deposit employment taxes on payments made during a month by the 15th day of the following month. If you’re a new employer, you will be a monthly depositor because your tax liability for the lookback period would have been zero.
If your total taxes on Form 941, Line 12, during the lookback period were more than $50,000, then you’re a semi-weekly schedule depositor. Any payments made on Wednesday, Thursday, and/or Friday require you deposit the employment taxes by the following Wednesday. And any payments made on Saturday, Sunday, Monday, and/or Tuesday require you deposit employment taxes by the following Friday.
If your total taxes on Form 941, Line 12, during the lookback period were more than $50,000, then you’re a semi-weekly schedule depositor. Any payments made on Wednesday, Thursday, and/or Friday require you to deposit the employment taxes by the following Wednesday. And any payments made on Saturday, Sunday, Monday, and/or Tuesday require you to deposit employment taxes by the following Friday.
If you want to help your employees get a better picture of their tax withholdings, check out this calculator from the IRS which helps determine the right amount they should withhold from their paychecks.
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If you’re thinking of offering new benefits to your employees , you should understand what benefits are taxable or non-taxable, and what the limits are for the benefits you must pay tax on.
Generally, most fringe benefits are taxable by the IRS, although there are several non-taxable fringe benefits.
A cafeteria plan is a written arrangement which allows employees to pay for certain qualified benefits with pre-tax dollars.
In the most recent draft of the IRS Publication 15-B, the IRS names some of these qualified benefits, including:
Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance)
Dependent care assistance
Group-term life insurance coverage (including costs that can't be excluded from wages
Health savings accounts (HSAs) (distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services
In Revenue Procedure 2022-38 the IRS announced inflation adjustments for several taxable fringe benefits in 2023:
Adoption assistance limit is $15,950, up from $14,890 in 2022
Health flexible spending account (FSA) limit on pre-tax contributions employees can make, through a cafeteria plan, is $3,050, up from $2,850 in 2022. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
Transportation fringe benefit limit is $300, up from $280 in 2022
It’s also important to note that in the Consolidated Appropriation Act for 2020, the minimum additional tax for failure to file a tax return within 60 days of the due date, increased to $435 or 100% of the amount of tax due, whichever is less. This is up from $330.
In addition to FICA taxes, you also need to ensure you’re complying with other state and federal payroll tax regulations.
Also known as FUTA, the Federal Unemployment Tax Act was created to provide funds to those who have lost their jobs. FUTA is paid by the employer — not the employee — at a tax rate of 6.0% on the first $7,000 of earned income in a given work year. Once the limit is hit, the employer is no longer taxed on that given individual.
Most states have their own unemployment tax under the (you guessed it) SUTA, or State Unemployment Tax Act. The tax rates vary by state. States typically reassign their tax rates for state unemployment taxes that are effective January 1.
Employers are also responsible for withholding state and local income taxes from employees’ wages. These vary state to state. The only states without an income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
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Managing payroll while keeping compliant with state and federal tax regulations is the ultimate juggling act. But you don’t have to go it alone. Solutions like Justworks provide tools and support to easily run payroll while helping you file your payroll taxes and stay on top of employment-related tax compliance.
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