Austin Tax Blog


If you are a business owner, there are several things you need to be privy to, and payroll taxes are certainly important.

To ensure that you pay the employees in your company above the board, keep reading for valuable information and an overview of how payroll taxes typically work and everything you need to know about them in 2020.

Payroll Taxes Types

When employers remove taxes from the paycheck of an employee, that cash is allocated for federal and state services. The following are the payroll taxes types:

  • Federal Tax Withholding (Income): The Federal income tax is contingent on income level, and the tax rates are progressive. What that means is that as you generate higher income, your percentage rates move, and your income tax goes up as transition up the various tax brackets. As things stand currently, there are 7 tax brackets that tax a person’s income at 37 percent, 35 percent, 32 percent, 24 percent, 22 percent, 12 percent, and 10 percent as income goes down.

  • State and Federal Unemployment Tax: Federal Unemployment Tax is an obligatory tax paid monthly vs. quarterly. The requirements of the state vary widely.

  • Social Security Tax: Also referred to as Survivors, Old Age, and Disability insurance, Social Security Tax is a flat-rate 12.4 tax of taxable income. Both the employer and the employee are responsible for paying 6.2 percent (half) of the social security tax.

  • State Tax Withholding (Income): Currently, there are 7 states that don’t have their own state income tax (Florida, Alaska, Nevada, Texas, South Dakota, Wyoming, and Washington). However, for every other state, income tax works similar to the federal tax withholdings. The rates of taxes are particular to every state, so be sure to peruse the withholding tables on the state government website where your specific business is situated.

  • Medicare Tax: The Medicare tax is also a flat 2.9 percent rate with the employee and the employer dividing the overall cost at 1.45 percent each.

  • Local Taxes: These kinds of taxes are specific to city-state and city. The majority of the states have state unemployment tax taken into consideration in this section of local taxes. Local taxes depend on laws of local tax, and the rates of tax differ, so small-sized business owners have to verify or check those taxes via the department of state tax.

Calculating Payroll Taxes in 2020

It is of paramount importance that you know how to calculate payroll taxes. The paycheck of an employee typically comprises federal income tax, Medicare, and Social Security. If you reside in a state with state tax withholding (income), you will be required to withhold state income tax.

When it comes to Social Security calculation, it is calculated at 6.2 percent of total gross pay, and the amount is capped once an individual reaches 137,700 dollars in earnings. That means that the maximum Social Security tax amount that you will pay up in a single year (every 12 months) is 8,537.40 dollars.

Medicare does not have any cap in contrast to Social Security, and you calculate it at 1.45 percent of the gross pay of an employee. If a certain employee is earning greater 200,000 dollars in one year, you will have to withhold an extra 0.9 percent for Medicare pay for anything more than 200,000 dollars. Only the employee pays this 0.9 percent and not the employer.

State and Federal income tax are slightly more challenging to calculate. Federal income tax is calculated using the W-4 Form, which a worker submits, showing their number of exemptions and filing status. To find out how much the exact tax to hold back from your employee, you will have to reference IRS (Internal Revenue Service) Publication 15B, Section 17: How to Use the Income Tax Withholding Table. Kindly keep in mind that the IRS updates this tax table every year.

There is a similar table annually produced by every state for state tax withholding (income). This table establishes how much state income tax to hold back from the paycheck of every employee. As a case to point, if your employees are working in the state of California, you can follow the 2020 Withholding Schedule’s directions to find out how much state income tax to hold back from the paycheck of your employees.

Changes in Payroll Tax Owing to COVID 19

Recently, the federal government successfully passed the CARES act (The Coronavirus Aid, Relief, and Economic Security Act) to assist in easing some of the financial load on small-sized businesses owing to the coronavirus pandemic. A few of the 2109 tax changes you need to be privy to include the deferral of payroll taxes, Employee Retention Credit, the write-off for improvements of property alteration of net operating losses, and much more. (You can find ample information about this subject matter online).

Penalties: Payroll Taxes

Payroll tax is due to the government. An employer can accrue interest and face strict penalties when the taxes are paid late, not paid at all, or are paid but do not adhere to the right guidelines.

3 elements characterize a correct deposit:

  1. The Deposit is timely made.

  2. The Deposit is made in the right and appropriate manner.

  3. The deposit made is in the correct quantity.

Failing to fulfill any of the elements mentioned above will subject deposit to the Failure to Deposit (FTD) penalty. The charged % rate is contingent on whether there is direct payment or the total number of calendar days a deposit is made in an untimely manner.

There happens to be a 4-tier penalty system (time-sensitive) for deposits made late as per IRC 6656(b)(1). The penalty rate evaluated is contingent on the total number of calendar days a deposit is made late beginning from the deposit’s due date.

Following are the penalty rates for liability amounts that are not timely or properly deposited:

  • 2 and 5 % for deposits that are 1-5 days and 6-15 days late respectively

  • 10 percent for needed deposits that an individual does not pay by Electronic Funds Transfer (EFT)

  • 10% for deposits made more than 2 weeks late (15 days to be exact). Furthermore, this is also applicable to the amounts paid inside 10 days of the date of the 1st notice asking for the tax due payment.

  • 15 % for all the amounts that are not paid more than 10 days post the date of the 1st notice asking for the tax due payment.


At this point, you would at least have a basic understanding of payroll taxes. Remember that all of the information above is not legal or tax advice that you can solely rely upon for your particular business. For advice or guidance particular to your business, it is in your best interest to consult with a legal or tax professional.

Always remember that payroll taxes can seem quite complex, but they do not have to be if you stay on top of things!

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