The rise of remote and hybrid work has driven more distributed workforces. And when you have employees working in more jurisdictions than ever before, your payroll taxes become increasingly complex.
You have to navigate local, state, and federal payroll taxes accurately and efficiently to maintain smooth operations as you grow. Your payroll team must be on their game with accurate tax withholding and reporting.
But many organizations struggle with payroll taxes for a few reasons:
- Misclassification of workers, which affects tax obligations
- Miscalculations in tax withholdings that can cause errors in wage reporting
- Lack of awareness of evolving tax codes and legislative changes
There’s a lot to keep track of with payroll taxes. We'll walk you through payroll tax regulations, including what they are, how to be compliant, and tips on streamlining the payroll process.
Federal payroll taxes
Federal payroll taxes play a crucial role in funding programs like Social Security and Medicare. Individuals and employers contribute a combined 15.3% for FICA (Federal Insurance Contributions Act) taxes — employees have these taxes deducted from their wages and employers match. To ensure compliance, you must accurately calculate and withhold federal payroll taxes.
Recent updates to tax laws and regulations, like Form 941 reporting, have made it even more important to stay informed and up to date. Changes in tax rates, deductions, and credits can have a direct impact on your payroll tax calculations. Payroll professionals need to stay current on these changes to guarantee accurate calculations and compliance.
State payroll taxes
State payroll taxes add another layer of complexity to payroll tax compliance. Each state has its own laws and regulations regarding payroll taxes, which can vary significantly.
Nine states don’t have a state income tax, while some have income, unemployment, and local taxes. Another nine states use a flat rate for state income taxes, and the remaining states have variable state income tax rates. If you’ve got employees working in different states, it can get complicated quick.
And that’s not all — there’s state unemployment insurance (SUI). Payroll taxes cover SUI (paid 100% by the employer) and go toward paying unemployment benefits to employees who lost their jobs.
The tax rates for unemployment insurance can vary based on factors like your organization’s experience rating and the state’s overall unemployment rate. And yes, every state has its own version of SUI, so you need to verify you’re following your state-specific regulations for accurate calculations and payments.
Local payroll taxes
On top of federal and state payroll taxes, your business may also be subject to local payroll taxes depending on the zip code, county, or municipality where your organization is based and where employees work and live. They can vary widely in terms of types and compliance complexities.
Common types of local payroll taxes include:
- School district tax
- Local income tax
- Local sales tax
- Transit or commuter tax
Compliance with these taxes often requires you to keep track of employees' work locations, determine the applicable local tax rates, and accurately withhold and remit the taxes to the appropriate local authorities.
Tax credits and deductions
Want to reduce your organization’s payroll tax liabilities and benefit from tax incentives? Of course you do — it starts with knowing what deductions are available and accurately claiming them to maximize tax savings.
For example, both the Work Opportunity Tax Credit (WOTC) and Disabled Access Credit gives businesses that make structural accommodations for employees with disabilities credits to do so. And the Employee Retention Credit (ERC) allows eligible employers to claim a percentage of qualified wages paid to employees during certain periods of economic hardship, like COVID-19.
There are many available credits and deductions, making it even more beneficial for your finance team and organization to be in the know.
Compliance and reporting
Inaccurate record-keeping and reporting or failure to comply with payroll tax regulations can be costly. And potentially get you in hot water with the Internal Revenue Service (IRS), which can assess fines and penalties.
- 1-5 days late deposit results in a 2% penalty
- 6-15 days late deposit results in a 5% penalty
- More than 15 days late deposit results in a 10% penalty
The IRS expects you to pay your tax deposit on time, accurately, and the right way. If you don't, you can expect the above fees. But if you continue not to comply, the Tax Division of the Justice Department can pursue civil litigation or criminal investigations if you willfully neglect your tax responsibilities.
Unpaid employment taxes are a big problem — the Justice Department found that $59.4 billion of taxes reported on Employer’s Quarterly Federal Tax Returns (Forms 941) are still unpaid. Needless to say, the IRS and Justice Department take payroll taxes seriously.
To ensure compliance and minimize the risk of errors:
- Maintain accurate records of employee wages, taxes withheld, and tax payments
- File payroll tax reports on time, adhering to federal, state, and local requirements
- Double-check calculations and reports to avoid errors
- Seek professional assistance or use payroll software with built-in compliance features
Follow these practices to minimize the risk of compliance issues and ensure accurate and timely payroll tax reporting.
Payroll tax changes and updates
Like anything else, payroll tax laws and regulations can change and get updated often. Staying on top of these changes is crucial for compliance and making any necessary adjustments to your payroll tax process.
A recent and noteworthy legislative milestone was the Tax Cuts and Jobs Act (TCJA). It brought about sweeping changes to the tax code, like tax rate adjustments, modifications to deductions and credits, and various tax provision revisions. It altered withholding tables, affecting how employers calculate federal income tax withholding from employees' paychecks.
Payroll tax resources and tips
Navigating payroll tax compliance can be challenging, but you can leverage various resources to stay informed and receive professional guidance. While these resources are a great starting point, long-term professional development can provide additional support and help keep you informed about payroll tax trends and best practices. Workshops, courses, and conferences are a good place to start.
Another resource? Professional associations and organizations focused on payroll and tax management. They can offer valuable resources and educational opportunities. Participating in professional development programs, networking with industry professionals, and working with a payroll tax partner can help you stay updated and gain insights into best practices.
Resources
Government websites, such as those maintained by the IRS and state tax agencies, provide information on payroll taxes, from due dates and official guidance to forms and publications related to payroll taxes.
Consider the following resources for payroll tax guidance and support:
- Government websites, such as the IRS and state tax agencies
- Professional associations and organizations dedicated to payroll and tax management
- Online forums or communities where professionals discuss payroll tax topics
- Webinars, workshops, or conferences focused on payroll tax compliance
By leveraging these resources, you can enhance your understanding of payroll tax compliance and stay informed on the latest developments and best practices.
Staying tax compliant
Constant tax changes can make staying compliant as challenging as it is important. We've got a list of tips that can help you ensure accuracy and timeliness:
- Go digital — use software to calculate and process payroll automatically
- Stay on top of current regulations and changes, plus tax credits and deductions
- Schedule routine audits of your reports, records, and tax forms to ensure they’re accurate
- Deposit your payroll taxes into the correct local, state, and federal agencies
- Know your deadlines, like when to file or payroll processing deadlines, to avoid penalties
- Classify employees accurately — many businesses often misclassify employees as independent contractors
- Pay your tax withholdings regularly to avoid cash flow issues later
- Know the differences between payroll taxes in states where you operate — some have separate tax brackets while others follow federal tax codes
- Outsource payroll to a partner, like OneSource Virtual (OSV), that knows the ins and outs of federal, state, and local tax laws and regulations
Payroll tax outsourcing
If it’s not clear by now, managing payroll taxes can sometimes feel like an all-consuming task for businesses. But it doesn't have to be — streamline the process and ensure compliance by outsourcing payroll tax management to a trusted partner.
A payroll outsourcing partner can handle various aspects of payroll tax compliance, including accurate calculations, timely reporting, and staying updated on tax law changes. By entrusting payroll tax management to professionals, you can free up time and resources to focus on other operational areas of payroll, HR, and finance, as well as other strategic initiatives.
Payroll tax outsourcing provides:
- Expertise and knowledge of payroll tax laws and regulations
- Reduced administrative burden and time spent on payroll tax tasks
- Minimized risk of errors and compliance issues
- Access to advanced payroll software and systems
- Peace of mind knowing that payroll tax management is in capable hands
Considering payroll tax outsourcing? Evaluate potential partners based on their experience, reputation, and the range of services they offer. Choose a partner that understands your organization's specific payroll tax requirements. And if you need help with compliance and filing your payroll taxes, check out our payroll tax services.
About OneSource Virtual
OneSource Virtual delivers in-tenant technology and expert services to automate the administrative, transactional tasks of Workday payroll, taxes, payments, and benefits. With over 1,000 customers and 95% customer retention, OSV is the leading exclusive provider of Business-Process-as-a-Service (BPaaS) solutions to Workday customers.
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