Employer Payroll Reporting and Compliance

Employers are responsible for reporting wages, tips and other compensation paid to employees by filing required forms with the IRS. Federal tax deposits must be made electronically, although small businesses may qualify for an exception. You must also provide employees with W-2 forms (and contractors with 1099s) detailing compensation paid and any withholding. Some states have additional requirements for reporting and withholding.

Payroll tax rules are complicated, and penalties for errors can be significant. Timely and accurate compliance helps avoid fines, which is why many small businesses outsource payroll tax administration.

Employer responsibilities

Employers withhold payroll taxes from employees' paychecks and remit them to the appropriate tax agencies. The primary types of payroll deductions include the following:

• Federal income tax. This is calculated based on each employee's salary, marital status and allowances claimed on their W-4.
• Social Security tax. You and your employee each contribute 6.2% of the employee's gross income.
• Medicare tax. Employers and employees each contribute 1.45%.
• Additional Medicare tax. For employees earning above a certain threshold, an extra 0.9% must be withheld.
• State income tax. Requirements vary by state; visit taxfoundation.org to verify rates and rules for your state.
• Local taxes. Some localities impose additional taxes, which range from flat rates to bracketed systems. Taxfoundation.org provides details on local tax obligations.
• Voluntary deductions. With employee consent, these may include:
  • Health insurance premiums
  • Life insurance premiums
  • Retirement contributions
  • Employee stock purchase plan contributions
  • Union dues or other specific employee costs, e.g., uniforms or meals

Employers are also responsible for preparing reconciliation reports for payroll-related payables and receivables, for submitting quarterly reports that show taxes withheld and amounts deposited, and for providing annual reports to the Social Security Administration. These reports are transmitted electronically by one of these four main methods:

• Electronic Federal Tax Payment System, which is available online or by phone and is free through the Department of the Treasury
• ACH transfer, which is a service of your financial institution
• Third-party service, which is a tax professional or payroll provider that handles payments on your behalf
• Same-day wire, which is available through your financial institution but is only used in special circumstances

Key payroll personnel

Effective payroll administration often involves specific personnel:

• Payroll manager: manages voluntary deductions, monitors multistate compliance and ensures accurate tracking of salary and hourly rates
• Payroll specialist: handles direct deposit setup, files payroll records and resolves payroll-related issues
• Payroll clerk: organizes time sheets, ensures timely payments, inputs payroll data, withholds taxes and distributes checks, when necessary

Smaller companies, however, may not have separate people in each role.

Staying on schedule

The IRS publishes an annual tax calendar, available on its website, that includes federal tax due dates and electronic reminders. Employers must maintain all required records for potential IRS inspections.