Payroll taxes or employment taxes are taxes that an employer withholds from employees’ paychecks to pay to the IRS. Along with withholding the correct amount of taxes from an employee’s paycheck, the business also adds to it taxes that he or she is required to pay as an employer. Social Security tax, for instance, is not paid entirely by the employee; half of it is paid by the employer. The responsibility of depositing the withheld amount resides with the employer.
Until the withheld taxes are actually paid to the IRS, they remain with the employer as trust fund taxes. Trust fund taxes include income tax, social security taxes, Medicare taxes, railroad retirement tax or collected excise taxes, and other employment taxes.
When it comes to depositing the trust fund taxes, an employer can choose either a monthly schedule or a semi-weekly schedule. As the schedule cannot be switched during a year, an employer needs to choose one before the start of each calendar year.
In an effort to encourage employers to pay withheld taxes promptly, Congress passed a law that allows the IRS to charge the Employment Taxes and the Trust Fund Recovery Penalty (TFRP). This penalty is enforced if the IRS cannot collect the required payroll taxes from a business. Negligent employers are faced with a failure-to-deposit fee of up to 15 percent for not making deposits on time. Therefore, timely withholding of income and paying all payroll taxes is essential for all qualifying businesses.
Tax reporting can be done by filing Form 940, 941 and 944. When depositing any funds, employers may use the electronic funds transfer (EFTPS).