In the United States, payroll taxes are assessed by the federal government, all fifty states, the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases and are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.
Federal, state, and local withholding taxes are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in those jurisdictions. Computation of the amount of tax to withhold is performed by the employer based on representations by the employee regarding his/her tax status on IRS Form W-4. Amounts of income tax so withheld must be paid to the taxing jurisdiction, and are available as refundable tax credits to the employees. Income taxes withheld from payroll are not final taxes, merely prepayments. Employees must still file income tax returns and self assess tax, claiming amounts withheld as payments.
Federal social insurance taxes are imposed equally on employers and employees, consisting of a tax of 6.2% of wages up to an annual wage maximum ($106,800 in 2010) for Social Security and a tax of 1.45% of all wages for Medicare. For the year 2011, the employee's contribution has been temporarily reduced to 4.2%, while the employer's portion remained at 6.2%. To the extent an employee's portion of the 6.2% tax exceeded the maximum by reason of multiple employers, the employee is entitled to a refundable tax credit upon filing an income tax return for the year.
Employers are subject to unemployment taxes by the federal and all state governments. The tax is a percentage of taxable wages with a cap. The tax rate and cap vary by jurisdiction and by employer's industry and experience rating. For 2009, the typical maximum tax per employee was under $1,000. Some states also impose unemployment, disability insurance, or similar taxes on employees.
Employers must report payroll taxes to the appropriate taxing jurisdiction in the manner each jurisdiction provides. Quarterly reporting of aggregate income tax withholding and Social Security taxes is required in most jurisdictions. Employers must file reports of aggregate unemployment tax quarterly and annually with each applicable state, and annually at the Federal level. Each employer is required to provide each employee an annual report on IRS Form W-2 of wages paid and Federal, state and local taxes withheld, with a copy must to the IRS and many states. These are due by January 31 and February 28 (March 31 if filed electronically), respectively, following the calendar year in which wages are paid. The Form W-2 constitutes proof of payment of tax for the employee.
Employers are required to pay payroll taxes to the taxing jurisdiction under varying rules, in many cases within 1 banking day. Payment of Federal and many state payroll taxes is required to be made by electronic funds transfer if certain dollar thresholds are met, or by deposit with a bank for the benefit of the taxing jurisdiction.
Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%. Similar state and local penalties apply. Failure to properly file monthly or quarterly returns may result in additional penalties. Failure to file Forms W-2 results in an automatic penalty of up to $50 per form not timely filed. State and local penalties vary by jurisdiction.
A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS. The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.
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