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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 might have the following check:

GROSS PAY $1000.
Federal income tax -$107.00
Social Security ($1K*6.2% - capped @ $160,200K in 2023) -$62.
Medicare ($1K*1.45% - no cap) -$14.50
Estimated state income tax -$50.00
NET CHECK $766.50

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 state unemployment taxes (SUTA) as well as other miscellaneous state level taxes.

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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