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Payroll Tax Basics in Massachusetts

By Peter Jason Riley

The very first step in hiring and paying employees is to obtain a federal "Employer Identification Number" (EIN). Filing a federal form SS-4 with your local Internal Revenue Service office accomplishes this (call 1-800-829-1040 or visit the Internal Revenue Service Website www.irs.gov to get your EIN number online).Once you have your EIN, many of the forms we mention in this article will automatically be sent to you.

Payroll checks have 4 basic taxes that are deducted in order to reach the employees "net check." These are:

  1. Federal income tax
  2. Social Security
  3. Medicare
  4. Massachusetts (State) income tax

(The employer may also be withholding pension and other types of employee benefit plans; we will not include these in this discussion.) An example of a basic paycheck calculation is as follows; a married taxpayer making $1000 a week claiming one exemption would have the following check in 2007:

GROSS PAY $1000.
Federal income tax (use Federal Circular E) -$74.
Social Security ($1K*6.2% - capped @ $106K in 2008) -$62.
Medicare ($1K*1.45% - no cap) -$14.50
Massachusetts state income tax (use Circular M) -$48.95
NET CHECK $800.55

Federal income tax withheld is calculated using the tables found in the federal Circular E (published annually). The employer must match the amounts "withheld" above for Social Security (the total due is 12.4%) and Medicare (the total due is 2.9%). The employer will pay all federal taxes withheld on behalf of the employees using federal deposit coupon (Form 8109) or through electronic funds transfer - EFTPS (for larger employers). The reporting form for these taxes is the Form 941, due quarterly.

The employer must also pay federal unemployment taxes (FUTA) on behalf of the employee. For Massachusetts employers FUTA will be generally .8% of the first $7,000 of payroll in a calendar year. FUTA taxes will also be paid on Form 8109 in the form of direct bank deposits. The reporting form for federal unemployment taxes is the Form 940 due annually.

The final filing for your employees in the W-3/W-2 Forms filed at year-end with the Social security Administration. Copies of the W-2 are also given to the employee. The detailed (and complex) rules regarding the calculation of taxes, deposit requirements can be obtained by ordering a Circular E (Publication 15) from Internal Revenue Service by calling 1-800-829-1040 or visit the Internal Revenue Service Website at www.irs.ustreas.gov.

For Massachusetts payroll taxes you first need to file a From TA-1 to register as a Massachusetts employer. Starting in 2004 you will need to register on-line at the Massachusetts Department of Revenue Website by clicking on "For Business" tab at www.dor.state.ma.us*.You will also need a Massachusetts Circular M to calculate Massachusetts's income tax withholdings. Both these forms can be ordered by calling 1-800-392-6089 or download by visiting the Department of Revenue Website at www.dor.state.ma.us.

The employer will also pay Massachusetts state unemployment taxes (SUTA). SUTA is generally around 3% of the first $14K of wages paid in a calendar year. You will first need to file a form 1110A "Employer Status Report" with the Department of Employment and Training to register to pay state unemployment taxes. The Massachusetts Department of Employment and Training can be called at (617) 727-6560 or visit their Website at www.detma.org. This tax can also be paid through the Massachusetts Department of Revenue website (or business website noted above *).

The Massachusetts employer with more then 6 employees may also be required to pay into the state Health Insurance fund by using Department of Employment and Training Form 1700-HI.

In summary the Massachusetts employer will typically have the following forms due on a quarterly basis:

  • Federal Form 941
  • Massachusetts Form WR-1 (for reporting total wages per employee for the quarter) - online
  • Massachusetts Department of Employment and Training Form 1 (SUTA) - online or paper
  • Massachusetts Form 1700-HI (if required)

Annually you will typically have:

  • Federal Form 940
  • Form W-3 and W-2's issued to all employees and copies to the Social Security Administration

The timing of tax payments by the employer is generally controlled by the amount of taxes due be sure to carefully consult Federal Circular E and Massachusetts Circular M for detail on these requirements. Be warned, the penalties for late payment of payroll taxes is very high.

Please remember that this information is a simplification of very complex rules and data. You should consult a qualified tax advisor in detail before implementing or utilizing any of this material!
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