Payroll tax refers to the money withheld from employee paychecks and remitted to the IRS or other government agencies. If your business hires full-time or part-time workers, you're responsible for calculating and withholding the correct amount of payroll tax from each paycheck.

Payroll taxes form a significant proportion of government revenue. In fact, taxes for social security and Medicare alone account for   23%   of government revenue. Read on to learn more about payroll taxes and why your business needs to remain compliant.

What are the Types of Employee Payroll Taxes?

There are 3 main types of payroll taxes: federal, state, and local. Federal taxes include social security and Medicare deductions, thus accounting for the biggest piece of an employee's tax burden. State-level taxes are the second-highest and they include deductions for retirement plans, insurance premiums, and child support payments.

Here's a more detailed breakdown of the 3 types of employee payroll taxes.

1. Federal Income Tax

Federal income tax is the money you withhold from employee paychecks for remittance directly to the IRS. The IRS calculates federal taxes based on income thresholds, Congress-enacted laws, and Department of Treasury regulations. As a result, federal income taxes function on a pay-as-you-go basis, and the IRS refunds any amount overpaid when the employee files a tax return.

• Social Security Tax

Social security taxes are deductions made to finance the social security system. Both employees and businesses pay social security tax, which is calculated as a fixed percentage of gross income. For example, employers withhold   6.2%   of each employee's paycheck up to a maximum taxable amount of $142,800. Employers also match this percentage amount for a total of 12.4%. The Social Security Administration (SSA) provides guidance on maximum taxable limits and revenue expectations during any given tax year.

Regardless of the current tax laws, your business should have a system in place for withholding, matching, and remitting social security taxes to the IRS. Timely remittance will help you avoid fines and penalties arising from delayed payments.

• Medicare tax

Similar to social security, Medicare is a benefit program for older adults. Medicare tax withholdings go towards financing healthcare programs for retirees. You should remit these payments along with social security taxes.

2. State Income Taxes

State income taxes are amounts employers withhold for remittance to relevant state agencies. Washington is one of the few states that doesn't require income tax withholding. Instead, your business may be subject to a public utility or business occupation tax.

If you operate in the transportation, energy, or communications field, you'll pay a varying public utility tax rate related to your specific operations. For example, energy companies are liable for a   3.8% tax rate   for distributing electrical power. Businesses in other industries such as retail are responsible for paying business occupation tax, which is based on gross income or the total value of your products.

3. Local Income Taxes

Local taxes are withholdings for specific municipalities within the state. Revenue from local taxes goes towards funding school districts, city councils, and other local programs. As a result, your business should withhold local and federal taxes from employee paychecks.

While payroll taxes are an essential source of government revenue, they can be complicated to figure out yourself. And the burden is even greater if you hire many employees. If you don't meet payroll tax obligations, your company could face significant consequences.

Fortunately, a business tax service can help you handle payroll taxes and avoid critical mistakes. At Bliss & Skeen CPAs, we offer reliable business income, tax planning, and filing services. In addition, we work with you to meet both federal and state tax obligations so you can spend more time growing your business.   Contact us   today.