Eight Things Doctors Should Know About Payroll Taxes

According to the IRS, employers are required to report and remit payroll taxes for every employee. While filing payroll taxes may be a seemingly straightforward task, physicians and other small business owners should have a basic understanding of these eight principles in order to avoid costly mistakes.

1. The Basic Formula for Calculating Net Pay

Calculating the net pay is a relatively simple calculation that is made up of several important figures. The calculation looks like this:

The employee's gross pay (pay rate times hours worked)
minus Voluntary deductions
minus Statutory tax deductions
______________________________________________
RESULT: net pay

Regardless of whether payroll occurs weekly, bi-weekly, monthly, etc., the same calculation is used. While this may look simple, the reality is, as with almost everything in accounting, the devil is in the details. The person responsible for computing payroll should check and re-check calculations to ensure that the payroll is error-free.

2. Voluntary Payroll Deductions

Voluntary payroll deductions are exactly what they sound like: deductions selected voluntarily by the employee. The employee must request the deductions in order for an employer to withhold the money. This type of deduction can be used to pay for a variety of benefits, including:

• Retirement plan contributions (such as a 401k plan)
• Employee stock purchase plans (ESPP and ESOP plans)
• Health insurance premiums (medical, dental, and vision)
• Life insurance premiums
• Union dues
• Uniforms
• Meals
• Other job-related expenses

Voluntary deductions should be tracked carefully and applied to the proper account. Depending on the type of benefit, they may be paid with pre- or after-tax dollars.

3. Statutory Payroll Tax Deductions

Statutory deductions are those withholdings that are required by law. Payroll taxes are statutory deductions. Doctors and other small business owners, in fact every employer, accept a fiduciary responsibility to take these withholdings from the employee’s paycheck and remit them to the proper tax agencies. Payroll tax deductions may include:

• Federal income tax withholding (based on withholding tables in Publication 15)
• Social Security tax withholding (6.2% up to the annual maximum)
• Medicare tax withholding (1.45%)
• State income tax withholding
• Various local tax withholdings (such as city, county, or school district taxes, state disability or unemployment insurance).

4. Payroll Tax Responsibilities for Doctors

In addition to collecting voluntary and statutory withholdings, employers also have the following responsibilities:

• Allocating and depositing the employer portion of the payroll taxes
• Depositing tax dollars withheld
• Preparing reports for state and Federal authorities
• Filing payroll tax returns
• Accounting for voluntary withholdings and ensuring that those monies are sent to the proper account
• Preparing annual W-2 forms

5. The Employer Portion of Payroll Taxes

Employers pay a portion of the total payroll tax for each employee. These taxes are an additional amount paid to the government and may be used to compute the fully-burdened cost of an employee. The employer-portion of payroll taxes includes:

• Federal unemployment taxes (FUTA)
• State unemployment taxes (SUTA)
• Social Security taxes (6.2% up to the annual maximum)
• Medicare taxes (1.45% of wages)

6. FICA Taxes

FICA (Federal Insurance Contributions Act) is a payroll tax that is comprised of Social Security and Medicare taxes. These taxes are paid both by the employer and the employees. Combined, the FICA taxes equates to 15.3%, which includes:

• Social Security (Employee: 6.2%)
• Social Security (Employer: 6.2%)
• Medicare (Employee: 1.45%)
• Medicare (Employer: 1.45%)

7. Reporting Payroll Taxes

Physicians have the same responsibility as any other business owner when it comes to reporting their tax obligation in a timely manner. They must also take care to deposit payroll taxes when they are due. Reporting requirements include:

• Annual federal unemployment tax return (Form 940 or 940EZ)
• Employer's quarterly payroll tax return (Form 941)
• Annual Return of Withheld Federal Income Tax (Form 945)
• Federal tax deposits
• Wage and Tax Statements (Form W-2)

8. Timeliness is Essential

Business owners can pay federal payroll taxes by mail or online. Regardless of which method is selected, it is important to know when payments and reports are due and to submit them on time.

As the business owner, the doctor or a trusted tax professional, should consider their choice of a payroll accountant carefully. In addition, an annual audit of payroll documents should be completed to ensure that any mistakes are caught before they become a bigger problem. Because employers act as an intermediary in collecting and sending taxes to the government, the IRS takes payroll taxes very seriously. In fact, it is one of the few issues that cannot be cleared away by a bankruptcy judgment.