Are you an employee or employer wondering how payroll taxes can impact you? Do you want to know what strategies exist to help you manage payroll taxes?
At Creative Advising, we are certified public accountants, tax strategists and professional bookkeepers with years of experience helping businesses navigate the complexities of payroll taxes. In this article, we will explain the differences between how payroll taxes impact an employee and an employer, and provide strategies for each to help them manage their payroll taxes.
Payroll taxes are taxes imposed on both employers and employees to fund Social Security and Medicare. Employers are responsible for withholding a portion of their employees’ wages and remitting it to the government. Employees are responsible for paying their portion of the payroll taxes.
Employers have the responsibility of calculating the payroll taxes, filing and remitting the taxes, and providing the necessary forms to the employees. Employers are also responsible for paying their portion of the payroll taxes. Strategies employers can use to manage payroll taxes include partnering with a payroll service, outsourcing payroll tax services, or hiring an in-house payroll specialist.
Employees, on the other hand, are responsible for paying their portion of the payroll taxes. Strategies employees can use to manage payroll taxes include reviewing their paycheck stubs to ensure that the correct amount of taxes is being withheld, and filing their taxes correctly.
At Creative Advising, we understand the complexities of payroll taxes and are here to help. Our experienced team of certified public accountants, tax strategists and professional bookkeepers can help employers and employees navigate the complexities of payroll taxes and develop strategies to help them manage their payroll taxes.
Contact us today to learn more about how we can help you manage your payroll taxes.
Employee Payroll Tax Obligations
Payroll taxes are taxes that are deducted from an employee’s paycheck that go towards covering things like Social Security and Medicare taxes. As Tom Wheelwright of Creative Advising often says, “The most important tax is the payroll tax.” Employees have an obligation to pay these payroll taxes, and the burden can be very high for many people. The exact amount of the payroll tax liability that an employee must pay is dependent upon their total income and any deductions they are eligible to receive, such as a 401(k) or other retirement plans.
Employees are responsible for paying both Social Security and Medicare taxes when filing their taxes. This rate is currently 6.2% for Social Security taxes and 1.45% for Medicare taxes. Depending on an individual’s income and deductions, these rates can vary, and the rate for Social Security taxes reaches a cap at a certain amount of wages. Employees can also be subject to other payroll taxes, such as state unemployment taxes and local taxes.
How do payroll taxes impact an employee versus an employer? Employees have the burden of paying these taxes, which can result in them having a reduced take-home pay from their earnings. This can be a large burden for some individuals, particularly those who have to pay the Social Security taxes in full with no cap. Employers, on the other hand, are obligated to withhold the taxes from their employee’s pay and to submit these funds to the government.
There are strategies that exist for both employees and employers to reduce the payroll taxes that they are obligated to pay. Employees can reduce their payroll taxes by making investments or contributions to retirement accounts, such as a 401(k). Doing this can reduce the taxable income of the individual and thus lower the amount of payroll taxes owed. Employers can also reduce payroll taxes by providing generous benefit packages to their employees. They can also take advantage of certain tax deductions that are available to them, such as the Deductible Business Expense Deduction. Employers can also encourage their employees to join pre-tax health insurance plans, such as a Health Savings Account (HSA).
The impact of payroll taxes on an employee’s benefits and compensation can be substantial. Payroll taxes take away from an employee’s take-home pay, leaving less money in their pocket for other necessities. This can also reduce the amount a company can contribute to employee benefits and compensation programs, as employers pay a portion or all of these costs. Employers should be mindful of the impact payroll taxes have on their employees and look into ways to minimize their burden through benefits and compensation options.
Employer Payroll Tax Obligations
Payroll taxes are essential for both employers and employees. These taxes are imposed by federal, state and local governments in order to support various programs that provide services to citizens. Employers have an obligation to withhold applicable payroll taxes from employee wages and remit payments on their behalf. Depending on the location of the employer, the amount and type of taxes may vary, but employers must be aware of their obligations to payroll taxes to ensure compliance with local, state and federal laws.
Employer payroll taxes generally include the employer’s share of Social Security and Medicare taxes, the Federal Unemployment Tax Act (FUTA), state unemployment taxes (SUTA) and state disability and workman’s compensation taxes, which vary by jurisdiction. Employers are also obligated to pay an employer-matching amount of the employees’ Social Security and Medicare taxes, which are generally the same rate as taxes the employee pays, plus any applicable fees and surcharges. Employers are also responsible for the filing and remitting of the payroll taxes to the applicable government agencies.
While payroll taxes can be an expense for employers, they also provide various benefits, such as Social Security, Medicare and Unemployment Insurance, for both employees and employers. Employers can also use payroll taxes to their advantage by taking proactive steps to reduce their liability. Strategies to reduce employer payroll tax liabilities include optimizing payroll deductions and scheduling, utilizing tax credits and deductions, and utilizing payroll services to help manage the payroll process.
The impact of payroll taxes on employee benefits and compensation depends on a variety of factors, such as the size of the company, the number of employees, and the type of compensation offered to employees. Generally speaking, payroll taxes can have a direct impact on the amount of money an employee can bring home in their paycheck; however, they can also have an indirect effect on the employment experience and can affect an employee’s ability to benefit from certain types of incentives or bonuses. In order to maximize employee benefits and compensation, employers should be mindful of their payroll tax obligation and take advantage of potential savings opportunities.
Strategies to Reduce Employee Payroll Tax Liability
At Creative Advising, we understand the importance of reducing payroll tax liability for employees. Featured in the Tax Cuts and Jobs Act of 2017 were numerous incentives and deductions designed to reduce taxable income for individuals. These benefits are typically maximized with strategic financial planning and when employers offer taxation-favorable payroll options.
One of the ways individuals can reduce payroll taxes is by contributing to a retirement plan. Contributions to a 401(k), for example, can reduce an employee’s taxable income by up to $19,500 in 2021. The employer can also contribute up to $13,500 to the same plan under certain circumstances. Contributions to other retirement plans like a Traditional IRA, SIMPLE IRA, and SEP IRA also count towards reducing an employee’s taxable income.
Another way employees can reduce their payroll tax liability is by taking advantage of tax-favorable payroll options offered by an employer, such as the Dependent Care Flexible Spending Account (DCFSA). The DCFSA allows employees to set aside up to $5,000 per year of pre-tax dollars to pay for qualified child or elder care expenses. Additionally, employees may be able to use a healthcare FSA to cover some healthcare expenses on a pre-tax basis, reducing taxable income.
How do payroll taxes impact an employee versus an employer? Payroll taxes are usually calculated as a percentage of an employee’s wages. Most taxes are withheld from the employee’s paycheck, such as the federal and state income taxes, Social Security tax, and Medicare tax. These taxes are paid by the employee and then matched by the employer. The employer is responsible for remitting the taxes withheld from an employee’s paycheck to the appropriate tax agency.
Employers must also pay their share of payroll taxes. Employers must pay the employer’s portion of the Social Security and Medicare taxes and unemployment taxes. Employers are also responsible for paying any additional payroll taxes, such as those imposed by the states they’re doing business in.
Strategies to reduce payroll tax liability exist for both an employee and employer. For the employee, contributing to a retirement plan and taking advantage of tax-favorable payroll options can help reduce taxable income. For employers, they can review their withholding policies, promote tax-favorable payroll options, and utilize payroll software to help automate the payroll process. Payroll taxes can add up quickly so it pays to understand the various payroll tax incentives available to help reduce their burden.
Strategies to Reduce Employer Payroll Tax Liability
As a business owner and employer, it’s important to understand the payroll taxes imposed on you and your company. Payroll taxes can represent up to 50% of your labor costs and can have a very real and measurable effect on your business. Fortunately, there are a variety of strategies available that can help you reduce your payroll tax liability.
Your first step should be to understand your legal obligations when it comes to payroll taxes. First and foremost, you must comply with federal, state, and local regulations. Knowing your obligations can help ensure that you meet them and are paying the correct amount of taxes.
Beyond that, you can look into strategies to reduce your payroll taxes through various deductions. For example, the IRS allows businesses to deduct the cost of providing employee health benefits, as well as the cost of retirement plan contributions for employees. These types of deductions can have a significant impact on the amount of payroll taxes employers must pay.
Finally, planning your payroll taxes for the year can help ensure that you pay the correct amount of taxes and take advantage of deductions that you may be eligible for. It’s important to use the best strategies to minimize your payroll tax burden in order to effectively manage your company’s finances.
How do payroll taxes impact an employee versus an employer? Payroll taxes are the responsibility of both employers and employees. Generally, employers cover the majority of payroll taxes and are responsible for withholding taxes from employees and making sure they get paid on time. Employees are responsible for paying their share of payroll taxes.
What strategies exist for each? Employers have the option of setting up a payroll deduction from an employee’s earnings each pay cycle to cover the employee’s share of payroll taxes. For employers, they should focus on understanding their legal obligations when it comes to payroll taxes and taking advantage of deductions that can limit their liability such as providing employee health benefits and retirement plan contributions. Employers can also plan their payroll taxes for the year in order to utilize any potential deductions that may be available and reduce their payroll tax burden. From an employee’s perspective, the strategies available to them to reduce payroll taxes are limited. They should make sure to stay on top of filing their tax returns and meeting their obligations to pay the correct amount of taxes.
Impact of Payroll Taxes on Employee Benefits and Compensation
At Creative Advising, our team of certified public accountants, tax strategists and professional bookkeepers understands the impact payroll taxes have on employees and employers alike. Payroll taxes can have a significant effect on employee benefits and compensation opportunities, as they impact the total amount of recompense an employer is able to contribute to each employee. The various fees and deductions associated with payroll taxes, such as the Medicare and Social Security taxes, must be paid by the employer on behalf of the employee. If not properly monitored or planned in advance, these withholdings must be taken from the employee’s salary.
For the employer, payroll taxes can also impact the overall budget and thus influence the financial incentives and benefits the organization can make available to its team of employees. While employers are responsible for the employer’s half of all payroll taxes, strategizing to reduce this percentage of the overall payroll burden can provide additional funds with which businesses can reward their staff. Setting aside funds for 401k contributions, bonuses, and additional medical benefits are just some of the ways our team recommends that organizations maximize their return on payroll tax contributions.
For employees, strategic tax planning can help reduce the amount of money held from paychecks via payroll taxes. Utilizing deductions, credits, and other strategies recommended by our team of certified tax strategists can help ensure that employees are optimizing their paycheck in terms of the overall amount they will bring home. Our team recommends working with a professional to evaluate your particular situation and develop tactics to keep your payroll taxes as low as possible.
Essentially, payroll taxes can have a significant influence on both employers and employees, depending on how each party strategizes and plans for their taxes. At Creative Advising, our team is equipped to provide guidance and insight to employees and employers so they can make the best decisions for their unique situation. Doing so can help maximize employee benefits and compensation as well as allow employers to maximize their return on payroll tax investments.
“The information provided in this article should not be considered as professional tax advice. It is intended for informational purposes only and should not be relied upon as a substitute for consulting with a qualified tax professional or conducting thorough research on the latest tax laws and regulations applicable to your specific circumstances.
Furthermore, due to the dynamic nature of tax-related topics, the information presented in this article may not reflect the most current tax laws, rulings, or interpretations. It is always recommended to verify any tax-related information with official government sources or seek advice from a qualified tax professional before making any decisions or taking action.
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