As a new employer, you probably have questions about what it means to “do payroll.” This brief introduction provides you with some background about your obligations as an employer. Remember that PayCycle* is designed to help you with payroll every step of the way. There are three main things you need to do related to payroll:
1 Pay your employees: calculate gross pay and taxes withheld each pay period
2 Pay taxes: pay taxes withheld from employees’ paychecks as well as tax liabilities you incur as an employer to the appropriate government agencies, such as the IRS or your state’s department of revenue
3 File tax forms: every quarter. Even if you’ve paid everything you owe, you still have to file tax forms that report your liabilities.
This introduction is designed to get you comfortable with the assistance PayCycle provides and to familiarize you with some common payroll jargon. For more detail, see IRS Publication E. (You can also
go to this publication from a link on the the PayCycle Resources page, under Federal Government Resources.)

Payroll taxes are those taxes withheld from your employees’ paychecks, as well as those taxes you pay as
an employer based on the wages you pay your employees. These include:
• Social Security and Medicare
• Federal and state unemployment
• Personal income tax (federal and state)
• Miscellaneous other state taxes
Most payroll taxes, such as income tax, apply to all earnings. However, some taxes have what is called a
wage cap—the maximum annual earnings per employee that is subject to that tax. These caps may be adjusted by the governing agency (typically annually).

Social Security and Medicare taxes are paid by both employers and employees. As an employer, you
withhold the employee’s part of the taxes and also pay a matching amount.
The employee tax rate (amount withheld) for Social Security is 6.2%. The employer tax rate for Social
Security is also 6.2% (12.4% total). This is a tax with a wage cap, which means that the tax is calculated
only up to a maximum dollar amount of wages per employee each year. For 2005, the wage cap for Social
Security is $90,000.
The employee tax rate (amount withheld) for Medicare is 1.45%. The employer tax rate for Medicare tax is
also 1.45% (2.9% total). There is no wage cap for Medicare tax, which means the tax is paid on all of the wages that the employee earns.

The Federal Unemployment Tax Act (FUTA), along with the state unemployment systems, provides for
payments of unemployment compensation to workers who have lost their jobs. For 2005, the effective
You’ll find Form W-4, state equivalents, and other useful forms for new employees in the
Taxes & Forms section of your PayCycle account, under Employee Setup. Once you enter
your employee’s W-4 and state information in their setup, PayCycle automatically calculates
withholding for you.
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FUTA tax rate is 0.8%. The tax applies to the first $7,000 employers pay to each employee as wages during the year, so your maximum FUTA liability per employee is $56.00 per year.

All states maintain a reserve for unemployment that is funded through an unemployment insurance tax. In
most cases, SUI is paid only by the employer. Employees in some states, such as New Jersey and
Pennsylvania, also contribute to SUI through their paychecks.
Most states have established a starting SUI rate for new employers. (Wherever possible, PayCycle
provides this rate to you.) After a designated period of time, employers are assigned an experience rate,
which may be higher or lower than the new employer rate depending on the employer’s reserve account
balance. You will receive a notice from the state if your rate changes.

Some states administer disability insurance (SDI) or workers compensation as a tax collected through
payroll. Many states also have a tax paid jointly with SUI that is used to fund job training programs. Where
applicable, PayCycle calculates these taxes for you.

Some types of employees are exempt from one or more payroll taxes, which means that they do not pay those taxes. For example, a minor working for a parent who is a sole proprietor does not have to pay social
security, Medicare, or FUTA.
In addition, certain portions of regular employees’ wages may be exempt from one or more payroll taxes.
For example, tax-sheltered or pretax insurance plans save both the employer and the employee money by exempting premium amounts from all federal taxes and some state taxes. Some fringe benefits, like SCorporation owners’ health insurance, are also taxed differently from regular wages. If your company is a not-for-profit 501(c)3 corporation, you do not pay FUTA at all—regardless of who your employees are. PayCycle tracks all tax rates and wage caps for you. Whenever there is a change coming, we automatically update our calculations. We 100% guarantee our paycheck calculations so you don’t have to worry. If there are tax rates based on employer experience (like SUI), we’ll prompt you to enter the rates that apply to you and provide you with assistance in finding your rate if you don’t know it. PayCycle automatically handles the special taxability of certain wage types. If you have employees who are eligible for special tax exemptions, you can indicate this when you are setting up the employee. Your accountant can help you determine whether you have employees who fall in this category; however, most employees pay all payroll taxes.

As an employer, you remit taxes to the IRS and to your state agencies either by paying electronically or by using a form provided by the tax agency. Before we cover the timing of tax deposit due dates or deposit
frequency, we’ll acquaint you with some common payroll terms.
Constructive Receipt
You become liable for payroll taxes on the date you pay your employees, regardless of when they did the work associated with that paycheck. This rule is known as constructive receipt. If you only pay employees
on Fridays, you only report a tax liability on Fridays, even if employees earn wages every day of the week. A common point of confusion is when work is performed in one tax period, but employees are paid in a
different tax period. The IRS only tracks when employees are paid, not the span of time when the money is earned.
Lookback Period
This is a reference period used by the IRS to determine your federal tax payment due dates. The IRS evaluates your tax liability during this twelve-month period and determines whether you are a monthly or a
semi-weekly depositor (see below) for the coming year. All new employers are monthly depositors.
Deposit Period
Refers to the span of time during which tax liabilities accumulate for each deposit due date.
Payment Coupon
The form with which a payroll deposit is submitted. For federal tax deposits, the payment coupon is Form 8109. When you pay electronically, you don’t need a payment coupon.

The following deposit schedules apply to all federal taxes other than FUTA.
Monthly depositors: You are a federal monthly depositor in 2005 if your company’s federal tax liability during the lookback period (7/1/03-6/30/04) was less than $50,000. This is why all new employers are monthly
depositors. Monthly depositors pay taxes for a given month by the 15th of the next month. For example,
June taxes are due by July 15th. (However, if the 15th falls on a weekend or bank holiday, the taxes are
due the next banking day.)
Semi-weekly depositors: If your lookback liability is greater than $50,000, you are a semi-weekly depositor. You pay taxes three banking days after the end of any semi-weekly period in which you accrued
a liability. The IRS divides the week into two periods: (1) Wednesday, Thursday, and Friday, and (2) Saturday, Sunday, Monday and Tuesday. Taxes accrued during the Wednesday-Friday period are due on
Example:
Tom’s Market pays employees every two weeks. Employees receive a paycheck on January 5th
2005, which covers work performed during the pay period December 15-December 31st 2004. In which month does the tax liability for this payroll fall?
Answer: Tom’s payroll is considered part of his January 2005 tax liability, even though the pay period
fell completely in December 2004.
the following Wednesday, and taxes accrued during the Saturday-Tuesday period are due on the following
Friday.
In some cases, when a bank holiday (such as July 4th or Christmas) occurs during the week, semi-weekly
depositors have an extra day to make their tax payment.
Exceptions to the Deposit Schedule Rules
There are two main exceptions to the monthly and semi-weekly tax deposit requirements, as follows.
Next-Day Deposit Rule: If you accrue $100,000 or more in federal tax liability at any point during a deposit period, you must remit taxes on the next banking day. This could result from a single payroll, or it could
result from multiple payrolls within a single deposit period (month or semi-week). For example, if you are a monthly depositor and pay a one-time bonus to employees that results in more than $100,000 in liability on
a single day, you must pay the amount due immediately. You also become a semi-weekly depositor until your lookback liability falls below the $50,000 threshold again.
Quarterly exemption: If your federal tax liability is less than $2,500 for a quarter, regardless of your deposit schedule, there is an option of paying taxes due with your tax filing at the end of the quarter, instead of
making deposits during the quarter.
Paying FUTA and SUI
Unlike other federal taxes, FUTA (federal unemployment tax) is paid on the last day of the month following the end of each quarter:
• April 30 (for Q1)
• July 31 (for Q2)
• October 31 (for Q3)
• January 31 (for Q4)
If you accrue less than $100 of FUTA liability in a quarter, you do not need to make a deposit until the following quarter.
You’ll never have to keep track of tax due dates with PayCycle. Whenever you have taxes due, PayCycle sends you an email and puts an item on your To Do list so you know exactly what to do. However, if the government notifies you of a deposit schedule change, you will
need to update this information in PayCycle. PayCycle automatically updates your deposit frequency requirements whenever you hit
the next-day threshold. PayCycle is designed to minimize your risk of tax penalties. Even if you have historically been eligible to pay quarterly, PayCycle always prompts you to pay federal taxes at least
monthly to ensure that your deposits are always on time. PayCycle does not support the forms required for quarterly payment of federal taxes.

Like FUTA, SUI is also paid once per quarter to your state.
State Withholding Schedules
Like the IRS, states have established deposit schedules for paying income tax you’ve withheld from your employees’ paychecks. When you register with the state revenue agency they notify you of your state
deposit schedule.
State Unemployment Insurance
Like FUTA, state unemployment insurance (SUI) taxes are remitted once a quarter, regardless of the employer’s size. In addition, other taxes administered by the state’s unemployment commission, such as
Arizona’s Job Training Tax or New York’s Re-employment tax, tend to be paid jointly with the SUI tax on a quarterly schedule. In states such as Florida and Nevada, where there are no state taxes withheld from
employee’s wages, SUI is the only payroll tax employers pay, so all employers pay taxes quarterly.

Now that you’ve given all your employees accurate paychecks and paid all the payroll taxes you owe, you’ve got one more responsibility: filing tax forms. This section provides an overview of the types of form filings required of all employers

Form 941. All employers file this tax form every quarter with the IRS. It compares federal payroll taxes owed with taxes paid during the quarter to determine whether your payments were timely and whether you have a balance due.
Form 940. All employers who pay FUTA file this tax form at year end with the IRS. Like Form 941, it compares FUTA tax liability with FUTA tax payments to determine whether your deposits were timely and whether you have a balance due.
Form W-2. All employers provide Form W-2 to each employee at year end as an earnings record for income tax filing purposes. You are also responsible for filing Form W-2 with the Social Security Administration.
PayCycle keeps track of your total FUTA liability and prompts you to pay FUTA whenever you hit the $100 threshold. PayCycle Payroll Plus also prompts you when you have a SUI payment due. Once you specify the deposit schedule in PayCycle, you don’t have to worry about the complexity of these schedules. PayCycle tells you when and how much to deposit. With PayCycle Plus we will provide payment coupons, which may be required to accompany a deposit. PayCycle prompts you whenever you have a tax form filing due. Remember: you must file tax forms each quarter, and at year-end, even if you have already paid all the taxes you owe! It’s very important to follow your PayCycle To Do list: if it’s on there, it’s something you need to do.

Wage Reports report wages paid to each employee for a given quarter. They are sometimes combined with a quarterly contribution report that calculates SUI tax owed and is typically accompanied by the SUI
payment at quarter end. Most states require both a wage report and a contribution report each quarter, either as separate forms or as a combined form. (California is one exception; only a wage report is filed
each quarter.) Many states also require a quarterly reconciliation for state income tax.
Annual Reconciliations. Some states require filing an annual reconciliation for income tax at the end of the year. This may or may not be accompanied by copies of employees’ W-2’s. Cities, counties, or school districts that assess tax may also require quarterly or annual forms and may require copies of W-2’s. Check with each agency to which you pay tax.