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PAYROLL TAX WITHHOLDING
What is payroll tax withholding?
Payroll tax withholding is one of the more important
task required by law of an employer. As an employer you are required
to withhold state income tax, federal income tax and also social
security and Medicare taxes from your employee's wages. Furthermore you are required to pay a matching amount of
social security and Medicare taxes for your employees and to pay State
and Federal unemployment tax.
Here's the procedure for payroll tax withholding:
Have each new employee complete IRS form W-4. You will use this form
to calculate the amount of federal income tax to withhold from the
employee's wages. Most of the states have income tax structures that
are based on the federal system, so you will use the W-4 to calculate
the amount
of state income tax to withhold as well.
Social security and Medicare taxes, also known as FICA taxes must be
withheld from your employees' wages. As an employer, you must also pay
a
matching amount of FICA taxes for your employees. Currently the social
security tax rate is 6.2%. You are required to withhold 6.2% of an
employee's wages for social security taxes and to pay a matching
amount in social security taxes until the employee reaches the wage
base for the year.
The wage base for social security tax is $76,000 for the year 2000.
Once that amount is earned, neither the employee or the employer owes
any social
security tax.
The Medicare tax rate is 2.9% for the employee and the employer. You
will withhold 1.45% of an employee's wages and pay a matching amount
for
Medicare tax. There is no wage base for the Medicare portion of the
FICA tax. Both the employer and the employee continue to pay Medicare
tax,
no matter how much is earned.
The employer also must pay State and Federal Unemployment Taxes (SUTA
and FUTA). The FUTA rate is 6.2 %, but you can take a credit of up to
5.4% for SUTA taxes that you pay. If you are eligible for the maximum
credit your FUTA rate will be 0.8%. The wage base for FUTA is $7,000.
You
will stop paying FUTA for each employee once his or her wages exceed
$7,000 for the year. You will need to check with your state about SUTA
tax
rates and the wage base. Generally, your SUTA tax rate is based on the
amount of unemployment claims that are filed by employees that you
have
terminated. When your business is new, your SUTA tax rate starts at
the maximum and declines if you build a history of few claims.
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