Payroll tax tips for solopreneurs and the self-employed

Payroll taxes are a huge pain. I’ve gathered a list of questions that I’ve heard a lot over my time assisting business owners get their business taxes in order. I wanted to go over a couple of frequently asked questions for payroll tax… 

What are Payroll Taxes?

Payroll taxes are taxes paid on the wages and salaries of employees. When someone says payroll taxes, they are typically referring to social security and medicare, most often referred to as FICA, Federal Insurance Contributions Act.

Isn’t that the same as Employment Taxes?

Kind of. Employment Taxes are deposited and reported to the IRS by employers on behalf of their employees. Employment taxes can include income tax, Medicare, and social security contributions. Employers are also responsible for contributing a portion to Medicare and social security taxes on behalf of their employees, and they are often also responsible for federal unemployment (FUTA) tax payments.

What are payroll taxes for the self-employed?

Those who are self-employed must remit social security and medicare taxes along with federal income withholding. This is different from a regular employee's payroll because you will be responsible for the total amount that is due. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. Sometimes self-employed people feel as though they are paying an extra tax because instead of having to pay half of the 15.3% like they did when they were employees, they now have to pay the full 15.3%.

Is income tax a payroll tax?

No. Income taxes are taxes levied by the government on income. Income taxes or federal taxes are withheld during payroll because the government (federal and/or local) requires the employer to withhold a certain amount of income whenever a payment is issued.

If my state does not have an income tax, do I still need to pay payroll tax? 

Yes. Payroll Tax is different from Income Tax.

What’s the difference between federal payroll and state payroll?

When it comes to payroll for states, different things are withheld according to the state/local tax law. For most states, a state income tax and possibly a local income tax or state unemployment tax are withheld. These amounts are withheld from an employee's pay and remitted to the appropriate agency. Whereas with federal payroll, it is consistent with FUTA, FICA, and Federal Income tax. 

How do I pay federal payroll taxes? 

Federal payroll taxes should be paid through eftps.gov or through your payroll provider.

Federal payroll forms you should know… 

940 – Employer’s Annual Federal Unemployment Tax Return

This form reports FUTA tax payments made over the calendar year to the IRS. Unlike FUTA payments, which are due quarterly, this form is due annually. If you are a sole proprietor or a single-member LLC taxed as a sole proprietor, you don’t need to worry about this form.  

941 – Employer’s Quarterly Federal Tax Return

This form reports Federal Income Tax withheld from employees’ paychecks and FICA withheld from both the employer and employee for the quarter.

944 – Employer’s Quarterly Federal Tax Return

This form reports Federal Income Tax withheld from employees’ paychecks and FICA withheld from both the employer and employee for the year for those who expect to pay $4,000 or less in employee wages for the year.

Where can I learn more about payroll tax?  

At ComplYant, we know that tax is complicated, and we’re here to help. In fact, we have a webinar that covers this topic that you might want to check out: Don’t forget to pay yourself: Do the self-employed pay extra tax and other payroll questions answered.

The IRS also has a page dedicated to employment taxes, so you can check out their resource to find helpful links to forms you may need. Don’t forget to sign up for ComplYant, completely free, to keep track of your relevant business tax obligations so you never miss a deadline.