Employee withholding is incredibly complicated. Payroll is complex enough, especially if you’re operating with multiple employee designations (full-time, part-time, freelance) or across state lines. Payroll withholding is a completely different animal, and it adds a layer of complexity that has serious ramifications if you get it wrong. Here are three common state and federal payroll withholdings to help you get it right every time.
What is Withholding Tax?
There are two types of withholdings that employers must be aware of:
- Employee deductions, which is the money an employee pays into your company’s benefits structure, such as a 401(k) and health insurance.
- Employee tax withholdings, which is the money paid to local, state, and federal government.
State withholding is particularly complicated because these rules are location-specific. All withholding taxes are basically crediting against the income taxes the employee is required to pay every year. About 90% of payroll estimated income taxes are withheld each year by the government so that citizens don’t fall behind on the tithing that our system requires.
Here are three common taxes that employers must be sure to withhold:
- Federal income taxes. Employees can select the number of deductions they’re seeking on their W-4 form, which decides how much of each paycheck is taken out—choosing to withhold a lot, many net the employee a tax refund later on. But if they decide to take out too little, they may have a larger paycheck each month, but they also may owe taxes at the end of the year.
- State income taxes work in the same way as federal. This money goes to fund your state government. Where it gets complicated is in the interpretation of how much money we’re withholding. That percentage varies by state. If the employee is working in a state different from the corporate office, taxes are paid in the state where the employee resides. Typically, the amount of the deduction varies too, depending on marital status, number of dependents, and taxable income. Just like federal taxes, this withdrawal is 100% funding by the employee. In some cases, depending on the state, if the employee is making a very low wage, you may not need to withhold any state income tax at all.
- FICA, which is the Federal Insurance Contributions Act, or more commonly known as Social Security, is a federal requirement that pulls a percentage of the employee’s wages and puts it in a kind of national shared savings account. The amount paid is based on the employee’s taxable income, and it goes into a retirement and disability fund administered by the government. In 2019, employers were required to withhold 6.2% of the first $132,900 of every employee. If the employee makes more than that number, that income isn’t required for the Social Security tax withholding.
Make FoxHire Your EOR Partner!
While these are three of the most common tax withholdings, they certainly aren’t the only ones. This kind of complexity can snarl a small business or a growing company. That’s where an employee of record (EOR) service like FoxHire can help. We can handle your HR and payroll, which means we also handle the risk. Talk with our team if you’re worried about getting employee withholdings right. We can help you stay legal—and so much more.