- Payroll withholding includes federal income tax, Social Security tax, Medicare tax and more commonly, state income tax. Federal income tax, Social Security and Medicare taxes are federal taxes, which the federal government regulates. The state government regulates state income tax, and if applicable, city/local income taxes.
The Internal Revenue Service is the statutory organization that handles the collection of federal income tax, Social Security tax and Medicare tax. Notably, Social Security and Medicare taxes are collected under the Federal Insurance Contribution Act's authority. Furthermore, employers in nine states do not have to withhold state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. - The employee must complete a W-4 form and submit it to his employer upon being hired or whenever he wants to change the terms of his federal income tax withholding. The employer must give the form to the employee during these instances. The employer uses the W-4 and the IRS' Circular E (withholding tax tables) to determine the amount of federal income tax to withhold.
If state income tax applies, the employee completes and submits the state income tax form, indicating his filing status and exemptions. The employer uses the state income tax withholding tables and the worker's state income tax form to calculate state income tax withholding. If the employee indicates on the related form that he is exempt from federal income tax and/or state income tax, then the employer does not withhold the tax. - Social Security and Medicare taxes are called FICA taxes. Furthermore, Social Security is also called Old-Age, Survivors and Disability Insurance. The FICA rates have been stabilized since 1990, according to the Social Security Administration. Social Security is 6.2 percent of gross income; Medicare is 1.45 of gross income. Social Security has an annual wage limit of $106,800; Medicare has none.
- The federal and state government requires employers to report payroll withholding. The employer reports federal income tax and FICA tax withholding to the IRS, either quarterly via Form 941, or annually via Form 944. For instance, if the tax liability is less than $1,000 and the IRS gives the employer written consent, it can report the tax liability via Form 944.
State reporting varies by state. The state Department of Revenue/taxation agency sets the reporting and payment schedule for employers. - Employers can face consequences for improperly withholding, reporting or paying payroll withholding. For instance, the IRS charges a failure-to-deposit penalty to employers who fail to make proper tax deposits. The penalty rate depends on the number of days the deposit is tardy, whether the employer submits a non-electronic payment but is required to submit payments electronically, and whether the payment is a direct payment.
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