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Payroll Tax Basics

The very first step in hiring and paying employees is to obtain a federal "Employer Identification Number" (EIN). Filing a federal form SS-4 with your local Internal Revenue Service office accomplishes this (call 1-800-829-1040 or visit the Internal Revenue Service Website www.irs.gov to get your EIN number online).Once you have your EIN, many of the forms we mention in this article will automatically be sent to you.

Payroll checks have 4 basic taxes that are deducted in order to reach the employees "net check." These are:

  1. Federal income tax
  2. Social Security
  3. Medicare
  4. Massachusetts (State) income tax

(The employer may also be withholding pension and other types of employee benefit plans; we will not include these in this discussion.) An example of a basic paycheck calculation is as follows; a single taxpayer making $1000 a week claiming one exemption would typically have the following check:

GROSS PAY $1000.
Federal income tax -$141.
Social Security ($1K*6.2% - capped @ $142,800K in 2021) -$62.
Medicare ($1K*1.45% - no cap) -$14.50
Massachusetts state income tax -$50.00
NET CHECK $732.50

The employer must match the amounts "withheld" above for Social Security (the total due is 12.4%) and Medicare (the total due is 2.9%). The employer will pay all federal taxes withheld on behalf of the employees using federal deposit coupon (Form 8109) or through electronic funds transfer - EFTPS (for larger employers). The reporting form for these taxes is the Form 941, due quarterly.

The employer must also pay federal and state unemployment taxes on behalf of the employee. The reporting form for federal unemployment taxes is the Form 940 due annually.

The final filing for your employees in the W-3/W-2 Forms filed at year-end with the Social security Administration. Copies of the W-2 are also given to the employee. The detailed (and complex) rules regarding the calculation of taxes, deposit requirements can be obtained by visiting Internal Revenue Service Website at www.irs.ustreas.gov

For Massachusetts payroll taxes you will need to register on-line at the Massachusetts Department of Revenue Website by clicking on "Business" tab at www.dor.state.ma.us*.

The employer will also pay Massachusetts state unemployment taxes (SUTA). SUTA is generally around 3% of the first $14K of wages paid in a calendar year. The Massachusetts Department of Employment and Training can be called at (617) 626-5075 or visit their Website at www.mass.gov/portal/employment/unemployment/.

In summary the Massachusetts employer will typically have the following forms due on a quarterly basis:

  • Federal Form 941
  • Massachusetts Form WR-1 (for reporting total wages per employee for the quarter) - online
  • Massachusetts Department of Employment and Training Form 1 (SUTA) - online
  • Massachusetts Form 1700-HI (if required)

Annually you will typically have:

  • Federal Form 940
  • Form W-3 and W-2's issued to all employees and copies to the Social Security Administration

The timing of tax payments by the employer is generally controlled by the amount of taxes due. Be warned, the penalties for late payment of payroll taxes is very high.

Please remember that this information is a simplification of very complex rules and data. You should consult a qualified tax advisor in detail before implementing or utilizing any of this material!

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