Payroll Tax Guide 2008
FEDERAL TAX GUIDE
|Payroll Tax||Responsibility||Tax Limits|
|Federal Income Tax||Employee Only||Withheld from employee's earnings based on marital status, number of dependents, pay frequency and level of earnings. The amount of tax withheld is calculated using IRS-prescribed tables or % rates.|
|Social Security Tax||Employee &; Employer||Maximum salary contribution for 2007 was $6,045.00 per employee ($97,500 taxable wage limit x 6.2%). For 2008, maximum salary contribution increases to $6,324.00 per employee ($102,000 taxable wage limit x 6.2%). Employer makes matching contribution.|
|Medicare Tax||Employee &; Employer||Maximum salary contribution for 2007 and 2008 is unlimited. Medicare tax is collected at 1.45% of total wages. Employer makes matching contribution.|
|Federal Unemployment Tax Act (FUTA)||Employer Only||Payment amount is 6.2% of the first $7,000 of non-exempt wages paid to each employee. However, employers can take a credit up to 5.4% for state unemployment taxes paid, effectively reducing the tax rate to 0.8%, except in states where credit reductions are in effect.|
Supplemental Wage Payments
In 2008, a 25% flat rate of income tax may be levied on bonuses or any extra income received by employee from employer in cash or kind, over and above normal wages or salary.
Example: If employee earns bonus of $1,500, a flat 25% or $375 could be withheld as federal income tax if the other conditions for supplemental wage payments apply. Beginning in 2005, there was an alternative flat withholding tax rate of 35% on acccumulated supplemental wage payments of more than $1 million paid during the calendar year to an employee.
Federal Insurance Contributions Act (FICA)
Social Security and Medicare taxes are paid in equal amounts by the employer and employee. The taxable wage base for both includes tips reported by the employee to the employer.
Each employer is liable for collection and payment of employee's portion of tax. It must be withheld from wages in much the same manner as income tax. Payments in kind are generally subject to Social Security and Medicare taxes—the same as wages paid in cash. No withholding exemption allowances are allowed for Social Security and Medicare taxes.
Third-Party Sick Pay
Employee may receive payments equivalent to salary or wages while sick, disabled, or convalescing under a plan established by employer. Amounts of compensation resulting from employer plans, state disability insurance, union funds, insurance carrier, etc., are generally subject to Social Security and Medicare taxes.
Third-party sick pay attributable to employee contributions remains nontaxable, along with workers' compensation payments. Third-party sick payments received by the employee more than six months after the employee last worked are subject to federal income tax, but are exempt from FICA and FUTA taxes.
Taxation of Tips
Cash tips of $20 or more received in a month while working for any one employer are subject to federal income, Social Security and Medicare tax withholding. Cash tips less than $20 a month are not subject to any withholding; but, that amount must be included under gross income on employee's income tax return.
Tips and the value of non-cash tips (such as, tickets, passes, merchandise) must be included in an employee's tips report (Form 4070, Employee's Report on Tips to Employer) on or before the 10th day of following month. No report is required if less than $20 received during a month. In addition, all cash tips that are subject to employee Social Security and Medicare taxes are included in the definition of wages for employer Social Security and Medicare tax purposes.
Federal Deposit & Reporting Requirements
|Taxes Accumulated||Accumulated Due Date||Comments|
|If $100,000 or more on any day during a deposit period, then:||Deposit taxes by next banking day||If monthly depositor accumulates a $100,000 tax liability on any day during a deposit period, it becomes a semi-weekly depositor on the next day and remains so for at least the remainder of the calendar year and for the following calendar year.|
|If over $50,000 during lookback period, then:||Deposit taxes semi-weekly||For paydays on Wednesday, Thursday or Friday, the deposit is due by the Wednesday after the payday. For all other paydays, the deposit is due by Friday following payday. If either due date falls on a legal holiday, the deposit is due the next banking day.|
|If $50,000 or less during lookback period, then:||Deposit taxes monthly||Make deposit by the 15th of the following month; due next banking day if the 15th falls on a weekend or legal holiday.|
|If less than $2,500 during a calendar quarter, then:||Remit taxes with quarterly Form 941, rather than depositing separately||If you qualify for Form 944 see instructions.|
The foregoing deposit requirements apply to federal income tax withheld and both the employer and employee Social Security and Medicare taxes. There are separate deposit requirements for non-payroll income tax withholding.
Determination of whether required deposit is semi-weekly or monthly is made annually, based on the amount of employment taxes employer reported for the 12-month lookback period ended on the preceding June 30. Report quarterly on Form 941 or annually on Form 944 if you qualify, the wages and withholding taken for federal income tax, Social Security and Medicare taxes.
Report annually on Form 940 the covered wages paid and tax remitted for the Federal Unemployment Tax Act (FUTA). FUTA tax is deposited by the last day of the first month after the quarter ends. If the amount is $500 or less, however, it may be carried over to the next quarter.
Electronic Funds Transfer
Certain employers must pay all federal business taxes (for example, income and excise taxes, as well as payroll taxes) using electronic funds transfer. The requirement applies to all employers who deposited more than $200,000 in total federal taxes (not merely payroll taxes) during calendar year 2001 or in a subsequent year, or were already mandated to use EFTPS. Mandated employers must register and make special arrangements before using this payment method.
STATE TAX OVERVIEW
|Payroll Tax||Responsibility||Tax Limits|
|State Income Tax (SIT)||Employee Only||Forty-one states, the District of Columbia and Puerto Rico, require income tax withholding on employees. States not requiring income tax withholding: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming. Tennessee has an income tax but does not require employee withholding. There are significant differences from state to state in tax rates, taxability rules and withholding procedures.|
|State Unemployment Insurance Tax (SUI)||Employers in all states; employee also in: —Alaska —New Jersey —Pennsylvania||Employer's SUI rate is recalculated at least annually, and is based on the firm's unemployment experience. Each state has a minimum and maximum rate. In 2007, the lowest rate was 0.0% and the highest rate was 11.2%. Each state defines for its employers the wages subject to SUI, with 2008 taxable wage limits varying from $7,000 to $34,000.|
|State Disability Insurance (SDI)||Employers subject in Hawaii, New Jersey, New York, Puerto Rico. Employees subject in California, Hawaii, New Jersey, New York, Puerto Rico, Rhode Island||Contribution amounts are determined by the state's maximum withholding amount and/or taxable wage limit and rate.|
|Tax deposit and reporting requirements for state income tax, state unemployment insurance and state disability insurance, vary by state.|
In addition, certain municipalities, school districts and other local governmental units may impose their own income or occupational taxes on persons who work and/or reside within their jurisdiction. For example, New York City has a resident personal income tax.
Unemployment Insurance/Disability Insurance Taxable Wage Bases
|District of Columbia||9,000||9,000|
|New Jersey (SUI, SDI, WF & HC)||26,600||27,700|
|Puerto Rico (SUI)|
|Rhode Island (SUI)|