Federal payroll rules in Canada, U.S., have similarities, but also differences
Business globalization is quickly connecting countries around the world. For payroll professionals in Canada who oversee their employer’s international payroll, it can be a daunting task, with new and unfamiliar laws, rules, and terminology.
The following highlights some of the key federal payroll requirements in the United States, using information from the Internal Revenue Service (IRS) and Thomson Reuters’ Canadian Payroll Manual.
Social security number (SSN): An SSN is similar to a social insurance number. Individuals in the U.S. need it to work, collect social security benefits, and obtain some other government services. Employers must record each new employee’s name and SSN from the employee’s social security card and keep it in their payroll records. Employers use the number when reporting employee earnings and deductions on year-end reporting forms.
W-4, Employee’s Withholding Allowance Certificate: This form is similar to a TD1. Each new employee must complete one. Employees should also fill out a new form whenever their personal or financial circumstances change. Employers use the information to calculate federal income tax deductions.
On the W-4, employees state whether they are married or single and show the number of withholding allowances — such as tax credits for children or dependants — that they are claiming. If an employee does not provide a W-4, the employer should deduct income tax as though the employee is single, with no withholding allowances.
Federal Income Tax Withholding (FITW): Employers must generally deduct federal income tax each pay period from all compensation they pay to employees. The IRS allows for a number of different income tax deduction calculation methods, with wage-bracket and percentage methods being most common, although it also provides tax deduction formulas for automated payroll systems.
The wage-bracket method is similar to the Canada Revenue Agency’s (CRA) payroll deductions tables, though the IRS not only divides its tables by pay period type, but also by employee relationship status. Each table consists of wage ranges and columns for the number of withholding allowances claimed.
The percentage method consists of an allowance chart and eight tax calculation tables (based on pay period). Employers use the chart to determine the total value of the employee’s withholding allowances for the pay period. They then subtract that amount from the employee’s pay period wages to determine the amount subject to income tax deductions. Employers then use the tax calculation tables to determine the amount of income tax to deduct.
There are different tax calculation rules for special payments, such as bonuses, commissions, and overtime pay, if the employer identifies them as separate from regular wages.
Federal Insurance Contributions Act (FICA): FICA is made up of both a social security (old age, survivors, and disability insurance) tax and a Medicare (hospital insurance) tax. Employers deduct the taxes from employees’ wages and pay an employer contribution.
The IRS states that generally employee wages are subject to the taxes, regardless of an employee’s age or whether the employee is receiving social security benefits. The social security tax is subject to an annual maximum wage (called a base wage limit). There is no maximum wage limit for the Medicare tax.
For 2018, the social security tax rate is 6.2 per cent each for employers and employees on annual wages up to $128,400 (all figures U.S.). The Medicare tax rate is 1.45 per cent each for employees and employers. An additional 0.9 per cent Medicare tax applies to employees only on annual wages exceeding $200,000.
Federal Unemployment Tax Act (FUTA): FUTA is not a payroll deduction, but an employer-paid tax. Employers are prohibited from deducting it from employees’ wages. Most employers pay both federal and state unemployment taxes.
Employers are generally required to pay FUTA if, in the current or previous calendar year, they paid wages of at least $1,500 in any quarter or had an employee for at least part of a day in each of 20 different weeks.
For 2018, the tax rate is six per cent on the first $7,000 in wages paid to each employee during the year; however, employers are allowed to credit amounts paid for state unemployment taxes, which can lower their FUTA rate.
Deposits: This is the term for remittances that employers must make to the IRS for FITW, FICA, and FUTA, although FUTA is deposited separately. The IRS requires employers to make their FITW and FICA deposits using electronic funds transfer (EFT).
Employers make their FITW and FICA deposits either monthly or semi-weekly, based on their total FITW and FICA liability reported on form 941 (see below) during a specified “lookback” period. The “lookback” period is a four-quarter, 12-month period that ends on June 30 of the previous year (for example: July 1, 2016 to June 30, 2017 for 2018).
Employers whose FITW and FICA liability is no more than $50,000 during the lookback period are monthly depositors. Those with a liability exceeding $50,000 are semi-monthly depositors.
The IRS requires employers on a monthly schedule to deposit their FITW and FICA taxes for the month by the 15th day of the following month. Semi-weekly depositors must generally make their deposits within three banking days after the semi-weekly period (Wednesday-Friday and Saturday-Tuesday) in which they are incurred.
For instance, for paydays on Wednesday, Thursday, or Friday, employers must deposit the taxes by the following Wednesday (since Saturday and Sunday are not banking days). For paydays on Saturday, Sunday, Monday, or Tuesday, the deposits are due by the following Friday.
Some exceptions apply. For instance, employers who accumulate an undeposited FITW- FICA liability of $100,000 or more during a deposit period must deposit the taxes by the next banking day regardless of their deposit schedule.
Employers who accumulate a FITW-FICA liability of less than $2,500 for a calendar quarter may pay the taxes at the end of the quarter. In addition, if deposit due dates fall on a Saturday, Sunday or bank holiday, the deposit is not due until the next banking day.
FUTA deposits that exceed $500 are due on a quarterly basis and must be paid using EFT. Amounts under $500 can be carried to the next quarter in the year, but must be paid by Jan. 31 of the following year.
Reporting: Employers have both quarterly and annual federal reporting requirements. On a quarterly basis, employers must submit form 941, Employer’s Quarterly Federal Tax Return, to the IRS.
On the form, employers report total wages paid, total FITW and FICA taxes incurred, and total deposits made during the quarter.
Employers required to pay FUTA must file an annual report, using form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
On the form, employers calculate the FUTA tax payable on their total taxable wages for the year; determine their credit for state unemployment taxes, and report the amount of FUTA they deposited during the year.
The form is due by Jan. 31 of the following year, although employers who paid all of their FUTA deposits on time have an extra 10 days to submit it.
Each year, employers must also complete a W-2, Wage and Tax Statement. Similar to a T4, employers use the form to report wages, tips, and other compensation paid to employees, as well as FITW and FICA taxes withheld.
There are also boxes for reporting employees’ wages and taxes deducted at the state and local level.
The deadline for giving employees their W-2 copies and sending the form to the Social Security Administration (SSA) is Jan. 31.
Employers filing 250 or more W-2s must submit them to the SSA electronically. Employers must also submit a copy of the form to the applicable state or local government.
In addition to federal payroll requirements, employers in the U.S. may also have to comply with state and local (cities, counties, school districts) rules.
Note: For more detailed information on U.S. payroll rules, visit the IRS website at www.irs.gov/businesses/small-businesses-self-employed/employment-taxes.
